Investing Under the Influence? SEC Issues Warning Letters to Celebrities and Social Influencers

Earlier this month, the Securities and Exchange Commission (SEC) issued a warning to celebrities and social influencers who use social media to encourage consumers to invest and/or purchase stocks. Recent celebrity endorsements for investment in Initial Coin Offerings (ICOs) were highlighted as examples in the SEC’s warning. In the future, if celebrities and social influencers do not disclose the nature, source, and amount of compensation paid, directly or indirectly, by the company in exchange for the endorsement, they may face action for violations of the anti-touting and anti-fraud provisions of the federal securities laws, participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.

This warning follows a wave of enforcement brought by the SEC earlier this year. In April 2017, the SEC filed civil fraud actions against 27 companies for the fraudulent promotion of stocks. These included three public companies, seven stock promotions/communications firms, two company CEOs, six individuals at the firms and nine writers. The actions were filed under Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, as well as Rule 10b-5, which prohibit fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of securities. In an effort by public companies to generate publicity for their stocks, defendants allegedly hired communications firms that paid writers to publish articles endorsing the company’s stocks. In one case, a firm allegedly had its writers sign non-disclosure agreements preventing them from disclosing that they were compensated.

More than 250 articles were published allegedly without proper disclosures regarding compensation received by the companies they were promoting. Seventeen parties have agreed to settlements with penalties ranging from $2,200 to $3 million based on the frequency and severity of the actions. One example of the kind of advertising that was targeted is shown here: It is a post on Seeking Alpha, an online forum dedicated to financial discussion, in which the post encourages investment in a particular Alzheimer’s therapy. The author’s name and picture allegedly were false as was a statement in the article that indicated that it was not sponsored content.

Here’s the lesson: The FTC is very much interested in ensuring that advertisers and their agents disclose when they disseminate sponsored content (as we’ve repeatedly written about here), but the FTC isn’t alone. The SEC clearly shares this concern, as does FINRA, which issued this notice in April 2017 addressing disclosure obligations relating to native advertising. For more information about how advertising standards apply to influencers and native advertising, check out our recent webinar here.

Associate Lauren Myers contributed to this post. She is practicing under the supervision of principals of the firm who are members of the D.C. Bar.

Instagram Expands its Influencer Tool, but is it Enough?

In June, we posted that Instagram users would start seeing a new “Paid partnership with” tag on certain posts. The company explained that this was part of a tool designed to “help creators more clearly communicate to their followers when they are working in partnership with a business.” (It also allows users to better track the performance of their posts.) Until recently, the tool was open only to a small group of users.

Last week, Instagram announced that they were going to expand the “availability of the tool to Instagrammers with high levels of engagement.” In addition, the company noted that people with access to the tool will receive in-app notifications when Instagram’s “systems find content that falls outside of our policy. In these cases, the content’s creator will be notified through the Instagram app and will have the option to tag a business.”

Although Instagram’s tool is intended to make it easier for influencers to comply with the FTC’s Endorsement Guides, it’s not clear to what extent the tool will have the desired effect. For example, in a Twitter chat hosted by the FTC in September, the FTC staff cast some doubt on whether the tools offered by Instagram, Facebook, and YouTube are sufficient to enable influencers to comply with their legal requirements.

There hasn’t been any enforcement on this issue yet, so it’s too early to tell whether the FTC will challenge companies and influencers who rely solely on these tools to make their disclosures. But if you do plan to do that, you may want to first discuss the risks with your legal counsel.

Time to Revisit Morals Clauses

Over the past few months, we’ve witnessed a steady stream of sexual harassment scandals in Hollywood. Many companies are taking proactive approaches and cutting ties with the men who have been accused of wrongdoing. Our colleagues at Labor Days recently discussed that issue from an employment law perspective. But it’s also worth considering how this type of issue can play out it in the context of a celebrity or influencer agreement.

Morals clauses generally give companies the right to terminate an endorsement agreement, if an endorser commits an act that falls within the scope of the clause. Given what’s at stake, the scope of that clause is often one of the most-negotiated provisions in these agreements. Endorsers naturally want the clauses to be as narrow and specific as possible. (For example, a clause might only kick in if an endorser is convicted of, or pleads guilty to, a felony.) This type of clause, though, won’t necessarily help if a celebrity is only accused of sexual misconduct. Thus, companies want more flexibility. (For example, they may push for a clause that allows termination if the endorser’s actions would subject the company to ridicule, contempt, controversy, embarrassment, or scandal.)

Keep in mind that the effectiveness of your clause depends not only on its scope, but also on how it works in conjunction with other provisions in your agreement. Consider, for example, how things work if your payments are stacked towards the front of the term. You may be able to terminate for a breach later in the term, but you may not be able to recoup the money you’ve already invested. (That said, our friends at Drye Wit wrote about a type of insurance that could help.)

There isn’t a one-size-fits-all approach here. A lot depends on the person with whom you are negotiating, the amount of money involved, and the nature and length of the campaign. However, the wave of recent scandals demonstrates that companies should give serious thought to these issues whenever they negotiate with a celebrity or influencer.

Genetically Modified – Naturally!

On October 25, the U.S. District Court for the District of Massachusetts dismissed a consumer class action under Massachusetts law, contending that Wesson vegetable oil is falsely labeled “100% natural” because it allegedly is extracted from genetically modified corn, soybean and rapeseed.  Lee v. Conagra Brands., Inc., 1:17-cv-11042 (D. Mass Oct. 25, 2017).  This was an unusually clean case in that there was no other ground challenging the “100% natural” claim and no counts for other legal violations.  The court thus had squarely to decide whether the presence of genetically modified ingredients renders a product not “natural” under the law.

The court’s decision that GMOs are not necessarily not natural relied on the FDA’s longstanding approach to the use of the term.  The FDA has no formal definition of “natural” as applied to foods, but its policy, as expressed in the Background section of FDA’s November 12, 2015, request for comments on the subject, is that “we have not attempted to restrict use of the term “natural” except for added color, synthetic substances, and flavors” and “we have considered “natural” to mean that nothing artificial or synthetic (including colors regardless of source) is included in, or has been added to, the product that would not normally be expected to be there.”  80 FR 69905.  The court was also influenced by the FDA’s policy not to require special labeling of products containing genetically modified ingredients based on its 1992 conclusion that “The agency is not aware of any information showing that foods derived by these new methods differ from other foods in any meaningful or uniform way, or that, as a class, foods developed by the new techniques present any different or greater safety concern than foods developed by traditional plant breeding.”  57 FR 22984.

The court concluded, “Because Wesson’s ‘100% natural’ label conforms to FDA labeling policy, it cannot be unfair or deceptive as a matter of law.”  That is a strongly stated, absolute conclusion.  This was not a pre-emption case, but a determination on the merits that the label is not deceptive.  One might wonder how this sits with the view espoused by the Supreme Court in POM Wonderful LLC v. Coca-Cola Co., 134 S. Ct. 2228 (2014), holding that food or beverage labels conforming to FDA labeling regulations can still be false or misleading under Section 43(a) of the Lanham Act.  The Supreme Court limited its holding to the federal Lanham Act, so POM Wonderful does not control consumer class actions brought under state laws, but its underlying logic was that FDA regulations – to say nothing of informal “policies” – are not the final authority on whether advertising and labeling statements may deceive consumers.

It will be interesting to see how other courts handle this issue as it relates to GMOs and all-natural claims, an increasingly common type of food marketing class action.  Also interesting is the potential gap opened up between Lanham Act and state consumer actions in terms of what is deceptive, which heretofore has been fairly coterminous.  This Conagra decision suggests that in a case this one or like POM Wonderful v. Coca-Cola, a competitor Lanham Act action could be permitted despite the label satisfying FDA regulations or other pronouncements, but the consumer class actions that typically follow Lanham Act cases, seeking their own bite at the pie, might not be.

Regulatory Changes Affecting All “Service Providers” – 12/31/17 Deadline

The U.S. Copyright Office has imposed new requirements on service providers in order to maintain safe harbor protection under the Digital Millennium Copyright Act (“DMCA”).  Service providers who don’t meet these requirements will lose the safe harbor protections afforded by the DMCA.  The deadline to comply with these requirements is December 31, 2017.

DMCA and the Safe Harbor

The DMCA was enacted by U.S. Congress in October 1998 with the purpose of addressing certain intellectual property issues in the wake of the Internet.  Among the DMCA’s key provisions is “safe harbor” protection, designed to shield companies from liability for infringement due to content posted by a user on the company’s website, provided that the company qualifies as a “service provider.
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KDW Ad Law Presents “Advertising Under The Influence: Rules of the Road For Your Company’s Next Influencer Campaign” via Webinar on Thursday, November 9, at Noon Eastern

Social media influencers help drive consumer engagement with the brands they love. Better reviews, more “likes,” and thousands of re-tweets can all add up to a bigger bottom line and greater insight into what sells and what doesn’t. When the line between advertising and objective content isn’t made clear, though, it can also prompt legal scrutiny and enforcement from the FTC. Join partner Kristi Wolff and Richard Cleland, Assistant Director in the FTC’s Advertising Practices Division on Thursday, November 9, at Noon Eastern for a webinar discussion of recent enforcement and key “rules of the road” for your company’s next influencer campaign.  To register for the webinar, please click here.

House Antitrust Subcommittee Explores the Role of Antitrust Law in Net Neutrality

On November 1, 2017 the House Antitrust Law Subcommittee held a hearing to discuss the role of federal agencies in preserving an open Internet.

The core question discussed at the hearing was whether current antitrust law is sufficient to ensure net neutrality absent FCC rules. The panelists—including FTC Acting Chairman Maureen Ohlhausen and Commissioner Terrell McSweeney; former FCC Commissioner Robert McDowell; and Michael Romano, NTCA Senior Vice President of Industry Affairs and Business Development—and committee members were generally divided down party lines, with Republicans arguing that FCC rules were both unnecessary and counterproductive and Democrats arguing that rules were necessary to ensure an open Internet, free expression, and innovation.

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Hilton Settles NY and VT State AG Investigation into 2015 Data Breach; Pays $700,000 Civil Penalty

New York Attorney General Eric T. Schneiderman and Vermont Attorney General TJ Donovan (“Attorneys General”) announced a settlement with Hilton Domestic Operating Company, Inc. (“Hilton”) resolving allegations that the company did not have reasonable data security practices in place and failed to provide timely notice after two security breaches involving payment card information. The settlement provides some valuable lessons to companies about the “most expedient time possible and without unreasonable delay” standard in state data breach laws, and how a data breach can uncover potentially deficient security standards that can raise exposure for companies. Continue Reading

Congressional Override Offers Industry Reprieve from CFPB Arbitration Rule but Battles Ahead Still Likely

Last week, the Senate voted 51 to 50 (with Vice President Pence casting the tiebreaking vote) to override the Consumer Financial Protection Bureau’s Arbitration Rule, which was finalized earlier this year in July.  As previously discussed here and here, the Arbitration Rule would have prohibited providers of covered consumer financial products and services from using pre-dispute arbitration agreements to compel consumers to participate in arbitration to resolve disputes about those products and services.  Shortly after the vote, the White House released a statement applauding the override vote and indicating that President Trump intended to enact it, effectively confirming that the Arbitration Rule will not come into effect.

The override occurred pursuant to the Congressional Review Act (CRA), which was enacted in 1996 to provide an easier mechanism for Congress to undo agency regulations without enacting wholly new legislation.  Under the CRA, both the House and Senate can use streamlined procedures that limit debate and the amendment process and allow Congress to overturn agency regulations with a simple majority in each chamber.  The CRA also prohibits agencies from issuing regulations that are “substantially the same” as the overturned regulation unless authorized by a subsequent law, meaning that the CFPB will be unable to simply pass a substantially similar rule in the next session of Congress.  The meaning of “substantially the same” under the CRA has yet to be litigated, so it’s at least possible that the CFPB could try to reissue another arbitration rule down the road even without subsequent legislation.

While the battle over the Arbitration Rule appears to be over for now, proponents of the rule vowed to continue to push related reforms and encouraged the CFPB to use existing authority to review and take action against unfair, deceptive, or abusive arbitration provisions.  The CFPB remains authorized to use its supervisory and enforcement authorities under the Dodd-Frank Act to regulate arbitration provisions.  While the repeal of the Rule means the CFPB can’t prohibit arbitration clauses in the aggregate via rule, it could still allege that particular arbitration provisions are unfair, deceptive or abusive on a case-by-case basis.  Providers of financial products and services, therefore, should remain cognizant of the CFPB’s regulatory and enforcement authority and evaluate consumer arbitration provisions in light of relevant court precedent and guidance to minimize the likelihood that such provisions are invalidated and/or garner CFPB interest.

“Local” Means Something, but What?

The “local” food movement is growing, as many consumers attempt to find fresher options, support local businesses, and reduce the environmental impact of shipping foods over longer distances. One problem, though, is that no one is quite sure what “local” means. As with the word “natural” – another word without a clear meaning – this ambiguity creates some risk for companies that want to advertise that something is “local.”

Bimbo Bakeries filed a lawsuit against a competitor with various claims, including trade secrets misappropriation, false designation of origin, and false advertising. Among all of those things was a “local” claim. Bimbo argued that U.S. Bakery’s “Fresh. Local. Quality.” tagline was false in Utah because U.S. Bakery neither maintained a baking facility in Utah nor contracted with a Utah facility to manufacture its products. U.S. Bakery filed for summary judgement, arguing (among other things) that the word “local” falls “within the category of non-actionable words because the term is vague and not measurable and is therefore merely an opinion.”

The court disagreed. In many cases, the analysis of whether a company has made a false designation of origin under the Lanham Act is easy. (For example, using “Idaho Potatoes” to describe potatoes grown outside of that state would be a problem.) In this case, the analysis was harder because the term “local” is less precise. Indeed, in a 2010 report, the USDA noted that although “local” has “a geographic connotation, there is no consensus on a definition in terms of the distance between production and consumption.” In this case, Bimbo provided surveys showing that the tagline was misleading and material to potential purchasers. “Because the term local does not carry a set definition,” the court determined that “whether the term is false or misleading is a question appropriate for the fact finder” and denied summary judgement.

Earlier this month, a jury determined that US Bakery had “engaged in false advertising by using the words ‘Fresh. Local. Quality.’ in connection with the advertising and promotion of its products.” The jury attributed over $8 million in profits to the false advertising and awarded over $2 million in total damages (including the trade secret claims). Because the Special Verdict form simply asked for “Yes” or “No” responses, we don’t have any insights into the analysis or a clear answer as to what “local” means.

This case may raise more questions than answers, but it suggests that companies need to think carefully before claiming that a food – or any other product – is “local,” especially if that word will be used in a state in which the product isn’t made or grown.

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