California to Tighten Rules for Automatic Renewals

Seven years ago, we posted about a new law in California governing automatic renewals. The law generally requires that companies: (1) clearly disclose the material offer terms before a consumers subscribes; (2) obtain affirmative consent to the terms before the consumer is charged; (3) provide a confirmation to the consumer that includes the terms, a description of the cancellation policy, information on how to cancel, and, if the offer includes a free trial, that the consumer may cancel before being charged; and (4) provide an easy-to-use method for canceling. Since then, we’ve seen several lawsuits under the law, including this one.

The state recently enacted a new law that adds additional requirements to the ones already on the books. Under the new law, companies will also be required to:

  • Provide a clear and conspicuous explanation of the price that will be charged after the trial ends;
  • Obtain consent before charging a consumer for an automatic renewal or continuous service that is made at a promotional or discounted price for a limited period of time;
  • Disclose how to cancel automatic renewal prior to payment for the continuing service after a free trial; and
  • Allow consumers to cancel online if they signed up online.

The new law isn’t effective until July 1, 2018, so companies have time to make change their processes. But these changes can require a lot of planning and technological changes on the back end, so it makes sense to start thinking about them now. This is an area that gets a lot of attention from regulators and class action attorneys, so the consequnces of getting things wrong can be significant.

Is It Time to Rethink Establishment Claims?

The decision in Kwan v. Sanmedica International, 854 F.3d 1088 (9th Cir. 2017) in April, has occasioned a lot of discussion about the apparent demise of the establishment claim “standard” in California.  What the Kwan decision should have done, but did not, is provoke some hard thinking about what this “standard” is and how we use it.  From the Kwan decision, it is apparent that the Ninth Circuit does not understand where the establishment claim principle came from and what it means.  But its error is understandable, because attorneys and judges have been careless with the principle and arguably have made much more of it than it should be.                                                                                                                                             

Kwan has been accepted as standing for two propositions.  The first, which should be non-controversial and unsurprising, is that in private suits brought under California’s Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA), a plaintiff must allege and ultimately prove that the offending advertising claim is false, not merely unsubstantiated.  There has been no serious dispute about this since the California Court of Appeal (Second District) decision in National Council Against Health Fraud, Inc. v. King Bio Pharmaceuticals, Inc., 107 Cal. App. 4th 1336, 133 Cal. Rptr. 2d 207 (2003).  What made Kwan news was that the court also rejected plaintiff’s allegations that defendant’s dietary supplements were “clinically tested to boost [human growth hormone] by a mean of 682%,” is provably false, and in so doing refused to “incorporate Lanham Act provisions into California’s unfair competition and consumer protection law by distinguishing between ‘establishment’ and ‘non-establishment’ claims.”  854 F.3d at 1097.    Continue Reading

Chairman Pai Set to Release Draft Net Neutrality Item

On November 21, 2017, FCC Chairman Ajit Pai issued a statement announcing that he had circulated his draft Restoring Internet Freedom Order to his fellow commissioners. The draft Order will largely undo the 2015 Open Internet Order and limit FCC jurisdiction over broadband Internet access services, although it appears that the order will retain a transparency requirement for broadband providers.  Fellow Republican FCC Commissioners Brendan Carr and Michael O’Rielly cheered the anticipated release, while Democratic Commissioners Mignon Clyburn and Jessica Rosenworcel opposed it.  Commissioners of the FTC—which could be the largest jurisdictional beneficiary of the Order, subject to a pending en banc proceeding in the Ninth Circuit—were similarly split down party lines in their reaction to the news.  Acting FTC Chairman Maureen Ohlhausen issued a statement expressing gratification that the FCC appeared to take the FTC Staff’s and Acting FTC Chairman’s public comments into consideration in formulating the draft Order.  The FCC will release the draft item on November 22nd, and is set to vote on the item on December 14th.  We will update you on the scope and implications of the draft Order when Chairman Pai releases it.

Will Your TV Watch You? FCC Green Lights Targeted Advertising in Next Gen TV Broadcasting Standard

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Last week, the Federal Communications Commission (FCC), in a 3-2 vote, approved an order allowing “television broadcasters to use the ‘Next Generation’ broadcast television (Next Gen TV) transmission standard, also called ‘ATSC 3.0.’”  Described in the Order “as the world’s first Internet Protocol (IP)-based broadcast transmission platform,” the Next Gen TV standard is expected to allow broadcasters to provide more targeted advertisements to individual viewers.  Some had expressed concerns over the collection of the demographic and consumer data necessary for Next Gen TV targeted advertising, and applicable privacy safeguards for the new standard.  At this stage though, the FCC majority took a wait and see approach to privacy concerns.

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FTC Announces $1.3 Million Settlement in Negative Option Case

Last week, the FTC announced that an online lingerie company had agreed to return more than $1.3 million to customers who enrolled in a negative-option membership program offering discounts and other benefits.

Under Adore Me’s VIP program, a member would be charged $39.95 per month, unless the member either purchased apparel or pressed a “skip” button during the first five days of that month. The company advertised: “If you do not make a purchase or skip the month by the 5th, you’ll be charged a $39.95 store credit that can be used anytime to buy anything on Adore Me.”

Despite promises that credits could be used “anytime”, for at least a year, a disclosure buried in the company’s terms stated that unused credits could be forfeited for a number of reasons. According to the FTC, the company “took unused credit amounts away from consumers who cancelled their memberships or initiated chargebacks with financial institutions to dispute their transactions with the company.”

In addition to alleging that Adore Me misrepresented its credit policy, the FTC also alleged that the company violated the Restore Online Shoppers Confidence Act by making it difficult for customers to cancel memberships, including by limiting how customers could submit cancellation requests, under-staffing its customer service department, and putting customers through drawn-out cancellation request processes.

Under the settlement, Adore Me generally agreed: (a) not make misrepresentations about its membership program; (b) provide an easy way to cancel memberships; (c) make specific disclosures about the negative option program, both up-front and in a confirmation notice; and (d) not to use billing information without customers’ express informed consent. In addition, the order imposes a $1,378,654 judgment that will be used to pay refunds to customers.

Companies that sell products or services through subscription models need to keep in mind that various federal and state laws could impact how these models are structured and advertised. Failure to comply with these laws could result in significant penalties, especially as the FTC, states, and class action attorneys increase their scrutiny.

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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