Section 13(b) at the Start of the Supreme Court’s October Term:  Where Things Stand, Where They’re Likely to End, And A Proposed Legislative Fix

The Supreme Court’s new term began last Monday. This new term has taken on heightened significance with President Trump’s nomination of current Seventh Circuit Judge Amy Coney Barrett to the High Court. President Trump and Senator McConnell have vowed to place Barrett on the Court this year, with the aim of doing so before the November 3 election. With her confirmation hearing underway, it seems all but certain that Judge Barrett will soon become Justice Barrett, giving the Supreme Court a 6-3 conservative majority and likely cementing a rightward shift in upcoming jurisprudence for years to come.

One primary concern of the Court’s newly invigorated majority is textual fidelity. Sticking to a textual interpretation of statutes was something former Justice Scalia touted as a central tenet of judicial restraint. While originally more a conservative position, textualist renderings of statutes— in which the Court hews closely to the words of the texts and eschews interpretations that stray from the language’s plain meaning—have gained acceptance on both sides of the legal divide.

For practitioners litigating before and against the FTC, the ramifications of this textualist shift in jurisprudence will likely be massive. In two consolidated cases currently pending before the Court, Federal Trade Commission v. Credit Bureau Center, LLC and AMG Capital Management, LLC v. Federal Trade Commission, the new justice and her colleagues will be tasked with deciding whether or not Section 13(b) of the FTC Act authorizes the FTC to seek monetary relief from the individuals and entities it pursues under that statutory provision. Those cases, stemming from the Seventh and Ninth Circuits, respectively, will be heard and decided sometime in the first half 2021.

Although the text of Section 13(b) speaks only of injunctive relief, appellate courts have extended the reach of 13(b) to include monetary “restitution” since 1982. In 1989, the Seventh Circuit in FTC v. Amy Travel Serv., Inc. decided that Section 13(b) “carries with it the power to issue whatever ancillary equitable relief is necessary.” 875 F.2d 564, 571 (quotation omitted). Over the years, this expansive definition of 13(b) was adopted by nearly all of the Circuit Courts.

But that expansive definition of 13(b) is beginning to erode. On September 30, 2020, the Third Circuit, in FTC v. AbbVie Inc. et al, joined the Seventh Circuit in concluding that the reach of 13(b) does not extend to monetary restitution. These appellate decisions, along with the new composition of the Supreme Court, strongly suggest that, absent a legislative fix, the FTC’s historically broad restitution powers under 13(b) may soon be cut back, leaving practitioners with a wide-open question: What comes next?

Many believe that a legislative fix is in order, and steps have been taken to address the issue in Congress. Proponents argue that the FTC needs the broad powers appellate courts have historically provided it under Section 13(b) to indemnify the public against truly bad actors who commit egregious fraudulent conduct. But is a return to the status quo ante the right course of action?

One view is that a legislative remedy should be limited, so that restitution would be available under 13(b) only where the conduct rises to the level of  the “dishonest or fraudulent” standard articulated in Section 19 of the FTC Act. The FTC has a need for vibrant Section 13(b) remedies, but those remedies are only appropriate where the actors either knew or should have known that their conduct was false or deceptive. In more of the run of the mill substantiation cases, administrative proceedings are far more appropriate. There is a strong argument that any new language added to Section 13(b) should make that distinction clear.

Federal Trade Commission v. Credit Bureau Center, LLC (“Credit Bureau”)

Credit Bureau concerns a credit monitoring website that offered consumers what was purportedly a “free credit report and score.” Consumers opting to receive this report would unknowingly be enrolled in a monthly “membership,” costing $29.94 a month. Consumers only learned that they had been enrolled in the business’s monthly service when they received a post-hoc letter, detailing the commitment they had supposedly made.

The FTC sued Michael Brown, the sole owner and operator of Credit Bureau, under Section 13(b) of the Act. Relying on this longstanding precedent allowing the FTC to use Section 13(b) to assess money damages, the district court ordered Brown to pay more than $5 million is restitution to the FTC.

The district court’s ruling was appealed to the Seventh Circuit Court of Appeals. The Seventh Circuit, in a precedential opinion, reversed, finding that the FTC does not have the authority to obtain monetary restitution under Section 13(b). In doing so, the Credit Bureau court admonished that Section 13(b) must be taken on its own terms. “By its terms, section 13(b) authorizes only restraining orders and injunctions,” not restitution. 937 F.3d 764, 767. Because Section 13(b) does not explicitly authorize monetary restitution, the Seventh Circuit concluded that the FTC has no restitution powers under 13(b).

Ironically, it had been the Seventh Circuit, in Amy Travel Serv., that had originally expanded the FTC’s restitution powers under Section 13(b) thirty-one years ago. Although the principle of stare decisis would normally have constrained the Credit Bureau panel to follow Amy Travel’s precedent, even if the current panel disagreed with it, the Credit Bureau court decided that the textualist Supreme Court of the present-day would not allow Amy Travel to stand. In the words of the Seventh Circuit, “[s]tare decisis cannot justify adherence to an approach that [recent] Supreme Court precedent forecloses.” 937 F.3d 764, 767. The FTC asked the full Seventh Circuit to rehear the case, but that request was denied.

After being denied rehearing before the full Seventh Circuit, the FTC petitioned for certiorari of the Seventh Circuit’s Credit Bureau decision to the Supreme Court. In its Supreme Court petition, the FTC asked the Supreme Court to uphold the textual reading of Section 13(b) that has become prominent over the past thirty years. The Supreme Court accepted the FTC’s petition, granting certiorari, in July.

Notably, the FTC is representing itself before the Supreme Court. This is highly unusual. In the normal course of events, the Solicitor General of the United States represents government agencies at the High Court. In this case, the Solicitor General chose to sit it out, signaling that the Trump Administration might agree with the Seventh Circuit’s reading limiting the FTC’s powers under 13(b).

AMG Capital Management, LLC v. Federal Trade Commission (“AMG”)

AMG is in many ways a parallel case to Credit Bureau, with similar facts leading to an opposite outcome. Indeed, depending on what happens at the Supreme Court next year, AMG may represent the last of the old guard of cases in which the appellate court affirms the FTC’s broad restitution powers under Section 13(b).

AMG, like Credit Bureau, involved a single-proprietor business, AMG Capital Management. The business’s sole function was to provide payday loans. The FTC sued Scott Tucker, the owner of AMG, under Section 13(b) of the Act, asserting that the terms disclosed in the loan notes provided to consumers did not reflect the harsher terms that Tucker actually enforced. The district court found Tucker liable, and pursuant to Section 13(b), levied a staggering $1.27 billion in equitable monetary relief to be paid by Tucker to the Commission.

Tucker appealed the district court’s ruling to the Ninth Circuit Court of Appeals, arguing, inter alia, that Section 13(b) forecloses monetary relief. Like the Seventh Circuit in Credit Bureau, the Ninth Circuit noted that the argument that 13(b) does not allow restitution “has some force.” 910 F.3d 417, 426. Yet, unlike the Seventh Circuit, the AMG panel concluded that it “remain[ed] bound by” the ample Ninth Circuit precedent broadly construing Section 13(b). Id. at 427.

Two of the three judges on the AMG panel, in separate concurrences, called for the Ninth Circuit to rehear the case en banc, in order to overrule its prior precedent (something only the full Circuit has the power to do in the Ninth Circuit). However, the full Circuit denied AMG’s petition for a panel rehearing. After its petition for rehearing was denied, AMG filed a petition for certiorari with the Supreme Court. The Supreme Court granted that petition in July, consolidating the case with Credit Bureau for a single oral argument.

FTC v. AbbVie Inc. et al (“AbbVie”)

On September 30, in a precedential decision, the Third Circuit joined Credit Bureau in concluding that “district courts lack the power to [authorize monetary disgorgement] under Section 13(b).” The facts in Abbvie concerned a patented drug called AndroGel. The FTC sued the owners of Androgel’s patent under Section 13(b), alleging they had filed sham patent infringement suits against generic drug makers, and that they had entered into an anticompetitive reverse-payment agreement with one of those generic providers. The district court awarded the FTC disgorgement of $448 million.

The Third Circuit reversed the order of disgorgement. In doing so, the Abbvie panel, like the Seventh Circuit before it, focused on the text of the statute. The Abbvie court found that the text was dispositive, allowing only injunctive relief and (at best) minimal monetary penalties. In the Third Circuit’s view, “Section 13(b) authorizes a court to ‘enjoin’ antitrust violations. It says nothing about disgorgement, which is a form of restitution.” Emphasizing this point, the court wrote that “[a] contrary conclusion would undermine the FTC Act’s statutory scheme.” In reaching its conclusion, the AbbVie court explicitly relied on the findings of its sister Circuits in Credit Bureau and AMG, calling the Seventh Circuit’s Credit Bureau decision “a thorough and well-reasoned opinion.”

Because AbbVie was just decided, the Supreme Court will not be hearing it directly this term. However, Abbvie indicates that, when it comes to 13(b), the dominoes are falling. The appellate courts, like the Supreme Court, have become much more textually inclined over the last decade. The Third Circuit’s AbbVie panel consisted of two Trump appointees and a George W. Bush appointee. The parties before the Supreme Court in Credit Bureau are currently in the midst of briefing. The Third Circuit’s AbbVie decision is certain to play a large role in that briefing, and has further potential to influence the Supreme Court’s Credit Bureau decision.

The End of Restitution Under 13(b)?

Seventh Circuit Judge Amy Coney Barrett, President Trump’s nominee to join the Supreme Court, has often affirmed her textualist beliefs. This past summer, Barrett was quoted as explaining that “textualism matters because it is a theory, one that I think is consistent with the judicial role under the Constitution of what I do quite often, which is interpreting statutes.” Although Barrett was not on the Seventh Circuit’s Credit Bureau panel that reversed Amy Travel and concluded the FTC does not have broad restitution powers under Section 13(b), she did join the majority of the Seventh Circuit in voting to deny rehearing of that panel decision. This, along with her textualist bona fides, strongly suggests a Justice Barrett would affirm the Seventh Circuit and reverse the Ninth Circuit, concluding that Section 13(b) does not allow for monetary relief.

Even in the unlikely event Judge Barrett is not confirmed to the Supreme Court, any of the other women on President Trump’s short list are likely to take a similar textualist position. Even the shrinking liberal wing of the High Court has lately been going textualist, especially when it comes to statutory language akin to that of Section 13(b), language that is far from unambiguous.

Earlier this year, in Liu v. Securities and Exchange Commission, the Supreme Court analyzed a similar statute found in the Securities Exchange Act, Section 21(d)(5). The appellate courts had historically treated that statute similarly to 13(b) of the FTC Act, allowing the SEC to use it to seek monetary relief even though its text said nothing about disgorgement. In its June 22, 2020 ruling, the Supreme Court significantly narrowed the disgorgement remedy, finding that the text of the Exchange Act does not allow for the broad monetary disgorgement SEC has been wielding. Notably, it was Justice Sotomayor—now probably the most liberal member of the Court—that authored the Supreme Court’s Liu decision.

Textually, Section 13(b) provides even more limited powers than Section 21(d)(5) of the Exchange Act. While the Exchange Act specifically allows for “any equitable relief,” Section 13(b) of the FTC Act expressly limits itself to injunctive relief. Given the textualist inclinations of the current Court, and its continuing march toward textualism if Barrett is elevated to the bench—there is good reason to believe the justices will soon narrow or even do away with the FTC’s ability to seek monetary relief under 13(b).

And forces in favor of doing exactly that are ensuring their voices will be heard.  An amicus brief filed last week by the Washington Legal Foundation summarized the position of the groups in a manner that they hope will be fruitful:

To ‘start with the obvious,’ ‘injunction’ does not mean ‘restitution.’  Credit Bureau Ctr., 937 F.3d at 771-772.  ‘Apples,’ after all, does not mean ‘oranges.’  Nor does ‘injunction’ mean ‘equitable relief (including, at times, restitution).’  That would be like saying that ‘apples’ means ‘fruit (including, at times oranges).’  Nor, finally, can it be said that some aspect of the FTC Act’s structure reveals Congress’s subtle intent to use ‘injunction’ to mean ‘injunction, but maybe restitution too.’  Section 13(b) is plainly designed to be ‘a simple stop-gap measure,’ 910 F.3d at 431 (O’Scannlain, J., specially concurring), one that enables the FTC to enjoin a practice while it uses other statutory authority to prosecute an offender.

The Issue is Having an Effect in the Courts and at the Negotiating Table

With the fate of Section 13(b) in the balance, practitioners and lower courts are catching on. In late August, for example, a Northern District of California court granted the Motion to Stay of defendant LendingClub in a 13(b) action, pending the Supreme Court’s determination in Credit Bureau. The district court reasoned that, if the High Court significantly narrows 13(b)’s scope, “the viability of the remedy motivating the case” against Lending Club would disappear.

The trial in LendingClub had been scheduled for October. In finding a stay of that trial warranted, the LendingClub court emphasized that the FTC’s authority to seek monetary relief under Section 13(b) (or lack thereof) is “an issue of enormous consequence to this case.” The court explained, “[g]oing forward with trial would needlessly burden LendingClub to put on a trial defense only to possibly have the entire enterprise mooted by the FTC’s inability to seek any monetary relief under Section 13(b).”

Lending Club is not the only defendant caught in the FTC’s crosshairs to raise the prospect of a near-term sea change. To date, at least nine other defendants in 13(b) actions around the country have requested that courts stay their cases pending the Supreme Court’s decision in Credit Bureau. We fully expect to see a flurry of these motions in the months ahead.

Earlier this month,  a federal district court judge in the Northern District of Texas granted one such motion, staying an FTC action against Match Group, Inc. In its complaint, the FTC had alleged that the company used fake love interest advertisements to trick consumers into purchasing paid subscriptions on Match.com, and sought disgorgement under Section 13(b). Notably, the Texas court chose to stay the case even though it was at an early stage – discovery had not yet commenced – evidently believing that the FTC would abandon its action if it could no longer receive a monetary remedy.

And just this past Friday, a federal district court in the Central District of California ruled for the FTC and against the defendants in FTC v. Cardiff, another 13(b) action. While the court had denied the defendants’ motion to stay the case prior to resolution of liability, “the Court recognized that the United States Supreme Court will likely decide whether restitution is available under Section 13(b)” in the coming term. The Cardiff court therefore stayed the resolution of liability pending the Supreme Court’s ruling, even though it had conclusively determined the defendants were liable under 13(b).

The effects of a potential Supreme Court decision neutering Section 13(b) also have implications outside of the courtroom. For companies currently engaged in FTC negotiations, knowing that a potential Supreme Court ruling limiting the FTC’s equitable powers under 13(b) can be a valuable asset. The awareness that the FTC may not be able to obtain monetary relief through Section 13(b) has an obvious effect on the context of such negotiations. Savvy practitioners now have the ability (some might say the obligation) to leverage the potential limitation of Section 13(b) restitution in order to push the FTC to discount monetary demands. After all, the FTC may soon lose any ability at all to demand monetary relief under 13(b).

What Comes Next?

Under the current 13(b) framework, the FTC has the ability to take a party directly to court, and to sue for both monetary and injunctive relief. If the FTC’s ability to sue for monetary relief goes away, the FTC will still be able to use Section 13(b) to enjoin a party in federal court, but in order to obtain monetary restitution, the FTC will have to resort to Section 19 of the FTC Act.

Under Section 19 of the Act, the FTC can seek monetary damages against a party in federal court, eventually. But the process to do so is cumbersome and time-consuming. First, the FTC must bring the case at the Commission before an Administrative Law Judge. Assuming the FTC prevails before the ALJ, the losing party can (and almost certainly will) appeal that decision to the full Commission. The FTC must make its case a second time before the Commission in order to receive a final order, allowing the case to be brought in federal court. Only then can the FTC begin prosecuting the actual lawsuit against the party. Especially compared to the current Section 13(b) framework, the Section 19 process is lengthy and convoluted, making it far harder for the FTC to obtain quick and effective monetary remedies.

There is some hope for those concerned about the FTC losing a major weapon in its arsenal following the Supreme Court’s Credit Bureau decision. On September 17, four Senate Republicans introduced S. 4626, the Setting an American Framework to Ensure Data Access, Transparency, and Accountability (SAFE DATA) Act – a comprehensive privacy bill. Section 403 of the bill, as currently written, would modify the text of Section 13(b) to clarify that the FTC has the explicit ability to obtain monetary restitution. The proposed provision comes in response to numerous agency requests for Congressional action on 13(b) following ongoing legal challenges to the scope of its authority.

While some portions of the SAFE DATA Act are contentious, revising Section 13(b) seems to carry bipartisan support. At a September 23 hearing on privacy legislation, Ranking Member Maria Cantwell, a Democratic Senator from Washington, suggested that the “core mission of the FTC would be crippled” without the authority to obtain monetary relief under Section 13(b). This suggests that a bipartisan legislative fix could be in the offing. Of course, given the political climate, such a legislative remedy is unlikely to be enacted until 2021, at the earliest. Without the enactment of such legislation, there is a very real possibility FTC’s ability to obtain monetary restitution from parties under Section 13(b) will be curtailed in the coming year.

Any Legislative Fix Should Curb FTC Excess

In the absence of the availability of monetary restitution under Section 13(b), the FTC will likely make more use of its remaining 13(b) powers. Particularly, the FTC will likely increasingly use Section 13(b) to attempt to enjoin and freeze companies’ assets quickly while a Section 19 action is pending. Instead of the current Section 13(b) landscape, consisting of federal litigation taking place over a defined period of time, followed by a potential money judgment (or not), companies in such a scenario would face potentially years of Section 19 litigation at the FTC and in court while their assets have already been frozen under Section 13(b).  This would have a devastating effect on a company’s business.

By losing its ability to seek 13(b) monetary restitution, the FTC could thereby ironically gain tremendous leverage over companies it ends up suing for injunctive relief under Section 13(b). Many companies would likely choose to settle with the FTC rather than face an indefinite asset freeze, even in those cases where settlement might not be appropriate.

To be sure, you would expect just about all parties to agree that the FTC should not be able to freeze assets of a typical advertiser whose substantiation for a product claim is called into question and there is no evidence that they acted in a dishonest and fraudulent manner. While there is an obvious difference between cases of fraudulent conduct and more run of the mill substantiation cases, the line has become increasingly blurred over the past ten years.

Given the Court’s leanings and the evident bipartisan support to reinvigorate Section 13(b), we may see a legislative fix in the coming year. Any legislative remedy should clarify that Section 13(b)’s remedies—both injunctive and monetary—can only be used against truly bad actors. In this regard, Congress has a clear legislative playbook to follow. Section 19 of the FTC Act allows the FTC to obtain monetary remedies only for “dishonest or fraudulent conduct.”

While the power courts of appeals have given the FTC under their expansive interpretations of Section 13(b) is warranted in severe situations, it should not be doled out to companies engaged in routine if not always perfect behavior, such as an alleged failure to properly substantiate claims. The FTC has other, administrative remedies to deal with those types of problems, and if the current Rules of Practice do not allow for acceptably fast disposition (they do not), those Rules can be revised. Section 13(b), however, is a powerful tool. If and when it is revised, Congress should ensure it is used only when necessary and appropriate – in cases involving dishonest and fraudulent conduct.

For more information on the FTC and other topics, see:

 

Advertising and Privacy Law Resource Center

Only two months after finalizing the CCPA regulations, the California Attorney General’s office today released a new set of proposed changes, most significantly addressing “Do Not Sell My Personal Information” requests. The office has also recommended changes to the regulations related to providing notice when businesses collect personal information offline, proof required when an authorized agent submits a request on behalf of a consumer, and a grammatical change related to providing notice of how to opt in to the sale of children’s information.

  • Do Not Sell Requests. The proposed addition specifies that a “Do Not Sell” request must “be easy for consumers to execute and shall require minimal steps to allow the consumer to opt-out.” The change would prohibit businesses from using any method that is designed to or would have the effect of preventing a consumer from opting out. The proposal enumerates specific examples, such as requiring a consumer to: (1) complete more steps to opt out than to re-opt in after a consumer had previously opted out; (2) provide personal information that is not necessary to implement the opt-out request; and (3) read through a list of reasons why he or she shouldn’t opt out before confirming the request.
  • Notice for Offline Collection. The proposal requires businesses that collect personal information offline to provide an offline notice, such as providing consumers with paper forms or posting signs in a store, or giving an oral notice if collecting personal information over the phone.
  • Authorized Agent Requests. The finalized regulations previously permitted businesses to require that a consumer provide the authorized agent with signed permission to submit the access or deletion request. The proposed change shifts the burden to the authorized agent to provide proof of signed permission, rather than imposing the requirement on the consumer to provide signed permission.
  • Children’s Information. The proposed grammatical change in section 999.332, requires businesses who sell personal information of children under the age of 13 or between the ages of 13 and 15 (rather than both) to include a description of how to make a sale opt-in request in their privacy policies.

The deadline to submit written comments related to these proposals is 5:00 PM PST on October 28, 2020. We will continue to monitor and will report any changes made to the regulations once they are finalized.

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For more updates and information on the CCPA and and other privacy topics, visit:

 

Futureproofing Privacy Programs
Building a successful privacy program requires much more than compliance with data protection laws. To thrive in today’s global, data-driven environment, companies also need to understand the political environment and public attitudes surrounding privacy in the countries in which they operate. Of course, companies must anticipate and adapt to changing privacy regulations as well. This webinar will present strategies to help meet these challenges, with a focus on setting up structures to join local awareness with global compliance approaches.

This webinar will feature Kelley Drye attorney Aaron Burstein, along with Constantine Karbaliotis, Abigail Dubiniecki and Kris Klein of nNovation LLP.

Register Here

Futureproofing Privacy Programs

Please join us for the following upcoming virtual events: 

October 13
Futureproofing Privacy Programs

Building a successful privacy program requires much more than compliance with data protection laws. To thrive in today’s global, data-driven environment, companies also need to understand the political environment and public attitudes surrounding privacy in the countries in which they operate. Of course, companies must anticipate and adapt to changing privacy regulations as well.

In conjunction with Canadian firm nNovation LLP, Privacy and Information Security practice chair Alysa Hutnik and partner Aaron Burstein will present strategies to help meet these challenges, with a focus on setting up structures to join local awareness with global compliance approaches.

Register Here


October 20
New Frontiers of the Intersection Between Privacy Laws, Antitrust and Misleading Advertising Enforcement
Canadian Bar Association (CBA) 2020 Fall Competition Law Conference
The Bureau is pushing the boundaries of the intersection between competition and privacy laws, and the pandemic has accelerated pre-existing trends in digital enforcement. The FTC is similarly continuing to pursue robust enforcement in cutting-edge areas such as data privacy and fintech. Join Alysa Hutnik and a host of others for this session for a conversation on misleading advertising priorities in Canada and the U.S. in the digital economy.

Register Here


November 10
Nuts and Bolts of Basic Advertising: Substantiation, Disclosures and Social Media
2020 ANA/BAA Marketing Law Conference: A Virtual Experience

Join partner Gonzalo Mon for this session, which will cover important principles of advertising law, including prerequisites to prove your claims, the type of proof required, how to make disclosures, and application of these principles to social media. In addition, it will cover options for challenging competitors. Whether new or experienced to advertising, this session will give you down-to-earth information you need to put later sessions into context. This presentation will put a great new spin on important topics.

Register Here


October 21
2020 Election Outlook: An In-Depth Analysis of the Race for the White House and Congress
Please join Kelley Drye’s Government Relations and Public Policy Group as we present a bipartisan assessment of the upcoming 2020 elections. Election analysts Greg Speed and Jim Ellis will provide a detailed and data-packed assessment of the current state of play in the race for the White House.  In addition, they will cover key Senate and House races and the prospects for control of both chambers in the upcoming 117th Congress.

Register Here

November 10, 2020
The Future of Consumer Protection and Privacy – What to Expect from the FTC
As the election approaches, our government prepares for a transition – either to the second term under President Trump or to the Biden Administration. As this is occurring, consumer protection law also finds itself in transition. Partners Christie Grymes Thompson and John Villafranco will focus on what this means, in terms of recent enforcement activities and priorities related to privacy, data security, marketing, advertising, and other areas of consumer protection.

Register Here

For on-demand webinar replays and other content organized around Advertising and Marketing Standards, Privacy and Data Security and Consumer Product Safety, visit the Advertising and Privacy Law Resource Center microsite.  Available via www.KelleyDrye.com, the site provides practical, relevant information to help in-house counsel answer the questions and solve the problems that they face on a daily basis.

Kelley Drye's Advertising and Privacy Law Resource Center

Prior to the September 30 deadline to sign or veto legislation, California Governor Gavin Newsom recently took action on three bills related to data privacy. Bringing some potential certainty to the dynamic CCPA landscape, Governor Newsom signed into law AB 1281, which provides for the extension of the CCPA’s exemptions related to employee data until January 1, 2022. In 2019, the Legislature exempted from the CCPA collection of personal information from job applicants, employees, business owners, directors, officers, medical staff, and contractors until January 1, 2021. Notably, AB 1281 only goes into effect if California voters do not approve the California Privacy Rights Act (CPRA) ballot initiative on November 3rd.

However, Governor Newsom vetoed two other privacy bills that would have tightened data- and service-specific regulations beyond the CCPA’s standards. Citing the risk of unintended consequences during the COVID-19 pandemic, Governor Newsom nixed SB 980, which would have created heightened privacy and security requirements for genetic data handled by direct-to-consumer genetic testing and analysis companies. Instead, Governor Newsom directed the state’s Health and Human Services Agency and Department of Public Health to work with the Legislature to identify “a solution that achieves the privacy aims of the bill while preventing inadvertent impacts on COVID-19 testing efforts.”

The second vetoed bill, AB 1138, would have required companies that offer “social media” services to obtain parental consent before allowing a user who companies actually know to be under the age of 13 to create an account. In his veto message, Governor Newsom explained that AB 1138 “would not meaningfully expand protections for children,” but indicated that he is “open to exploring ways to build upon current law to expand safeguards for children online.”

Privacy developments in California this year are unlikely to end with the Legislature’s session. As we have discussed, the November 3rd vote on CPRA could have far-reaching implications for California privacy law. With the election only 33 days away, we will continue to monitor and post relevant updates.

In a series of orders issued earlier this month, Judge Dale S. Fischer of the Central District of California dealt two strikes to putative class claims against ticket merchants Ticketmaster/LiveNation and StubHub that seek refunds for Major League Baseball games cancelled or “postponed” in the wake of the coronavirus pandemic.  See Ajzenman, et al. v. Office of the Commissioner of Baseball, et al., No. 2:20-cv-03643 (C.D. Cal. Apr. 20, 2020).

In April, fans hit the MLB, 30 MLB teams and the ticket merchants with a proposed class action lawsuit alleging that the postponement of games (as opposed to the cancellation of games) was a conspiratorial decision to avoid paying refunds to fans for their tickets.

Of the initial eight named plaintiffs in the suit, just three purchased tickets directly from the ticket merchants—one from Ticketmaster/LiveNation, and two from StubHub.  Judge Fisher compelled all three of these plaintiffs to arbitrate their claims.  Relying on Lee v. Ticketmaster LLC, 817 F. App’x 393 (9th Cir. 2020) and related caselaw, Judge Fisher determined that these plaintiffs entered into enforceable modified or “hybrid” clickwrap agreements with Ticketmaster/LiveNation and StubHub because the companies adequately made their terms and conditions—including an arbitration agreement—available by a sufficiently prominent hyperlink on registration, sign-in, and purchase pages.

The ticket merchants also moved to dismiss the claims of the five remaining plaintiffs who purchased their tickets from the MLB defendants, on the grounds that they failed to sufficiently allege a conspiracy.  Judge Fisher noted that many of the conspiratorial allegations in the complaint were vague, and that the more specific allegations were irrelevant to Ticketmaster/LiveNation and StubHub.  Still further, the court found that Ticketmaster did not have the power to cancel baseball games, and thus plaintiffs’ theory that all the defendants formed a conspiracy to cancel games was implausible.

Judge Fisher gave the fans one last chance to amend their allegations, suggesting that if plaintiffs’ theory was that “all Defendants formed a conspiracy not to give refunds rather than not to cancel games in order to avoid refunds, they must allege it in their complaint.”

The MLB defendants similarly filed motions to compel arbitration and motions to dismiss, which are still pending.

The court’s skeptical view of the plaintiff’s alleged conspiracy will likely mean that this refund class action will end up in individual arbitration—like most refund class actions with plaintiffs who agreed to terms in connection with their purchase.  Plaintiffs will be hard pressed to hold parties liable unless they purchased their tickets directly from them.

 

 

Continuing its intense focus on internet platforms’ role in political debate and the liability protections they receive under the Communications Decency Act (CDA), 47 U.S.C. § 230, the Trump Administration this week submitted a legislative proposal that would substantially limit platforms’ Section 230 immunity. The Administration’s legislative proposal joins several other bills that take aim at platform immunity. It is unclear whether any of these proposals will advance in the near term, but the proposals are a sign of sustained, bipartisan concern about the breadth of Section 230 immunity. Nonetheless, the Administration’s proposal in particular provides a look at some of the far-reaching changes to Section 230 that are under consideration.

In a transmittal letter to Congress, Attorney General William Barr writes that, while Section 230 played a “beneficial role . . . in building today’s internet, by enabling innovations and new business models, . . .” internet platforms now “use sophisticated algorithms to suggest and promote content and connect users” and “can abuse this power by censoring lawful speech and promoting certain ideas over others.”

Under current law, “interactive computer services” – a term that has been broadly read to include social media sites and other companies that allow users to post content – receive two forms of immunity. Section 230(c)(1) provides platforms with immunity (subject to limitations for criminal activity and intellectual property rights infringement) for third-party material that they host. Section 230(c)(2) provides internet platforms with immunity for voluntarily taking down or restricting access to information online, provided that they do so “in good faith” for a number of reasons enumerated in the statute (e.g., removing obscene or harassing material).

The Administration’s proposal would limit both types of immunity and could cause further changes in how platforms structure and manage their services. Three of the most significant changes are:

  1. No defense against civil claims by federal agencies. The Administration’s proposal would strip internet platforms of a Section 230 defense against civil charges brought by a federal agency. At least two defendants (Accusearch and LeadClick) in FTC enforcement actions have asserted, unsuccessfully, that Section 230 immunizes them from liability for unfair or deceptive practices. However, Section 230 may come up more frequently as a barrier to charging companies in the first place. The Administration’s proposal would remove this barrier.
  2. Increasing platforms’ “responsibility” for third-party content. Section 230 currently provides that a person or entity that is “responsible, in whole or in part, for the creation or development of information” is not entitled to Section 230 immunity for that content. The Administration’s proposal would define “being responsible” to include, among other things, soliciting, commenting upon, funding, or altering information provided by another person or entity. Although some of this is arguably consistent with Section 230 case law and Attorney General Barr’s letter asserts that this definition is intended to deny immunity to platforms that “actively choose to modify or encourage” harmful material, the language in the proposal appears to be far more expansive. For instance, “commenting” on content could include labeling content as harmful or inappropriate for certain audiences.
  3. Terms of service requirements. Finally, the Administration proposes to limit some of the flexibility companies have to take down content by mandating some degree of transparency and equal treatment in Section 230’s “good faith” requirement. Currently, companies are able to take down content if it falls into certain categories – such as being obscene or excessively violent – or if the content is “otherwise objectionable.” The proposal adds some new specific categories but eliminates the “otherwise objectionable” option. Specifically, to remove information in “good faith,” platforms would need to:
    •  “State plainly” their content-moderation practices in their terms of service;
    • Take down or restrict access to content in a manner that is consistent with their content-moderation policies;
    • Take down or restrict access to all content that is “similarly situated;” and
    • Give the content provider notice of a restriction and an opportunity to respond.

Although the main focus of this proposal seems to be big social media companies, such as Twitter and Facebook, it sweeps more broadly, and could impact any company that allows users to post content on their sites. We will continue to monitor developments relating to Section 230.

Senate Commerce Committee Republicans Include 13(b) Fix in New Privacy LegislationLate last week, Senate Commerce Committee Chairman Roger Wicker (R-MS), along with Senators John Thune (R-SD), Deb Fischer (R-NE), and Marsha Blackburn (R-TN), introduced S. 4626, the Setting an American Framework to Ensure Data Access, Transparency, and Accountability (SAFE DATA) Act. The comprehensive privacy bill was years in the making and follows a discussion draft released last November. The SAFE DATA Act expands upon last year’s discussion draft, among other things, strengthening the Federal Trade Commission’s enforcement authority.

Specifically, Section 403 of the bill, as introduced, would clarify the FTC’s ability under Section 13(b) of the FTC Act to obtain monetary remedies for consumers. The provision comes in response to numerous agency requests for Congressional action on 13(b) following ongoing legal challenges to the scope of its authority.

While the SAFE DATA Act – or any privacy legislation, for that matter – faces long odds for passage in the waning days of the 116th Congress, the bill lays the groundwork for further action in 2021.

Additionally, it is worth noting that while Congressional Republicans and Democrats remain at odds on the path forward for comprehensive privacy legislation, there may be bipartisan support for a 13(b) fix. During a Senate Commerce Committee hearing on privacy legislation earlier today, Ranking Member Maria Cantwell (D-WA) suggested that the “core mission of the FTC would be crippled” without the authority to obtain monetary relief under Section 13(b).  Later this fall, the Supreme Court will hear argument on the issue with a ruling expected this spring.  The implications of that ruling could inspire a legislative response.

Stay tuned for more installments of the “Section 13 (b)log.”

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Ad Law Access Podcast

Companies get excited when they find pictures of celebrities wearing (or using) their products, and often wonder whether they can post those pictures to their social media accounts. In addition to the right of publicity issues we’ve noted in the past, a new decision from a federal court in New York serves as a reminder that companies also need to consider copyright issues.

Photographer Mark Iantosca took a picture of a digital content creator wearing Elie Tahari clothing. Elie Tahari posted that picture on its social media accounts with the following caption: “@linhniller caught us in our footsteps wearing head to toe #ElieTahari. We loved how she styled the whole look.” Although the caption also tagged Iantosca, the company hadn’t sought his permission, and the photographer sued for copyright infringement.

In its defense, Elie Tahari argued that the use of the photograph was de minimis because reposting another’s picture has become commonplace on social media. Although that’s an argument that in-house counsel frequently hear from their marketing teams, the court soundly rejected it. “There is nothing ‘trivial’ about a business utilizing a professional photographer’s work to promote its products.” To hold otherwise “would represent a seismic shift in copyright protection.”

The court also rejected Elie Tahari’s arguments that its post did not amount to infringement simply because the company credited the photographer in the caption of its post or because it had hired the model to wear its clothing. “Simply put, attribution is not a defense against copyright infringement [and] defendant’s argument that the model is wearing defendant’s clothing line has no bearing on liability for copyright infringement.”

Many people who use social media in their personal lives repost pictures without permission from the photographers and without any consequences. It’s tempting to think that the same is true if you repost pictures on your company’s social media accounts. As this case demonstrates, though, the consequences for doing that can be much greater.

After gyms closed in mid-March due to the coronavirus pandemic, LA Fitness was among the many fitness facilities faced with unforeseeable closures, outraged members, and class action litigation.  Last Thursday, a Florida federal judge ruled that a gym member did not have Article III standing to maintain a class action because he had already received a full refund of membership dues, and another gym member was bound to arbitrate his claims.  See Barnett v. Fitness International, LLC, No. 20-cv-60658 (S.D. Fla. Mar. 30, 2020).

On March 30, 2020, Plaintiff Kip Barnett filed a putative class action for negligence and unjust enrichment against Fitness International, LLC d/b/a LA Fitness, alleging that it had voluntarily closed its fitness facilities around the country and kept millions of dollars in unearned membership fees for the month of March.  This filing came after LA Fitness told members that it was suspending all billing beginning on April 1, and offered to either extend memberships for longer than the duration of the closure or provide a complimentary three-month membership for a friend or family member.  LA Fitness also started providing refunds to all members “in good standing who [] made such a request instead of choosing the other benefits offered to them.”

LA Fitness moved to compel arbitration based on an arbitration agreement in Plaintiff Barnett’s personal training agreement, as there was no such clause in his general membership contract.

Shortly thereafter, Plaintiff Barnett filed an amended complaint, adding a second plaintiff (Samuel Enzinna) who had not signed an arbitration agreement.  However, at the time of this amended filing, Plaintiff Enzinna had already received a full refund of his March dues.

LA Fitness then moved to dismiss the amended complaint and the Court granted its motion as to both plaintiffs in different orders.  First, the Court ruled that Plaintiff Barnett had agreed to arbitration and dismissed his claims without prejudice.  Second, the Court found that, because Plaintiff Enzinna had been fully compensated for his alleged loss, he lacked Article III standing.  The court also rejected Enzinna’s request for injunctive relief in the form of a guarantee that LA Fitness will not charge membership fees at some future time during the pandemic, finding the argument to be “unduly conjectural and hypothetical” given that LA Fitness had already suspending its billing.

Refund cases make up a majority of COVID-19 class action filings, ranging from suits involving universities, monthly memberships, travel cancellations, and sporting events.  This case—one of the earliest decided—suggests that companies that took prompt action to remedy their customers’ injuries may be spared from the time and expense of lengthy class action litigation.

Last week, a federal judge in the Southern District of New York dismissed a putative class action alleging that L’Oreal’s “EverSleek Keratin Caring” hair products deceived consumers into believing the products contained keratin. United States District Court Judge George B. Daniels rejected these allegations, finding that the challenged statements were clear both on their own and when read in context of the entire label.

Judge Daniels analyzed all of the Plaintiff’s claims (which included breach of warranty, fraud, and violations of several consumer protection statutes) under the “reasonable consumer” standard.  He relied on three aspects of the “EverSleek Keratin Caring” labels to conclude that reasonable consumers would not interpret the labels in the same way manner that the Plaintiff alleged.

First, both the front and back of the labels stated that the products were 100% vegan.  Given that the Plaintiff affirmatively alleged that keratin was “a protein naturally present in human hair, skin and nails,” the Court found that it was not reasonable for her to assume that a vegan product would contain keratin.

Second, the ingredient lists on the product labels did not include keratin.  As the Second Circuit has previously held, it is unreasonable to assume that a product contains an ingredient when that ingredient is not included in the ingredient list.  See Jessani v. Monini N. Am., Inc., 744 Fed. App’x 18, 19 (2d Cir. 2018). (finding that “truffle flavored” olive oil did not deceive consumers into believing that the product contained truffles, especially where the ingredient list did not include truffles).

Finally, the labels repeatedly stated that the products are “Kertain Caring,” and the product description itself stated that the “EverSleek Keratin Caring system with sunflower oil, gently cleanses chemically straightened hair while caring for the essential protein and keratin that is found in hair” (emphasis in the opinion).  The Court ruled that these statements, “read in conjunction with the fact that the ingredient list is extremely clear, leads to the conclusion that Plaintiff has therefore not met the burden of demonstrating that a reasonable consumer could find that the Products claim to contain keratin.”  The Complaint was dismissed in its entirety.

As Judge Daniels aptly noted, “a simple reading of the label would have resolved” the Plaintiff’s issues.  This is good news for companies that have been plagued by these types of suits, and shows that courts are willing to dismiss cases in which consumers close their eyes to plain language on a label in favor of their own contrary and conclusory interpretations of the words before them.

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