Nixing the FixCompanies watching the “right to repair” legislation proposed in some states should not lose sight of the federal landscape. Last week the FTC released a bipartisan report concluding that there is “scant evidence to support manufacturers’ justifications for repair restrictions.” This will likely add momentum to groups pushing for legislation requiring companies, particularly electronics manufacturers, to create products that people can fix without extra costs or having to purchase special tools.

The report responds to a Congressional directive to report on anticompetitive practices related to repair markets. It reflects information provided in connection with a 2019 FTC workshop on repair restrictions,  empirical data, public responses, and independent research. In the report the FTC states that, as many consumer products have become harder to fix and maintain with repairs requiring specialized tools and other generally inaccessible materials such as proprietary diagnostic software, consumers have very limited choices when their products. The FTC also highlights  the burdens to communities of color and lower incomes, and the amplified effects in connection with COVID-19.

Congress and the FTC have addressed previous concerns about the potential for anticompetitive effects associated with warranty repairs. The Magnuson-Moss Warranty Act contains an anti-tying provision (Section 102(c)) that prohibits a warrantor from conditioning its warranty on the consumer’s using any article or service identified by brand name unless the article or service is provided for free or the warrantor obtains a waiver from the Commission. The FTC believes that a significant number of technological advancements and repair restrictions have “diluted” the anti-tying provision and “steered consumers into manufacturers’ repair networks or to replace products before the end of their useful lives.”

To address these concerns, the Commission will consider “reinvigorated” regulatory and law enforcement options and consumer education.

The FTC also expressed willingness to work closely with Congress on potential legislative options.

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Subscribe here to Kelley Drye’s Ad Law Access blog and here for our Ad Law News and Views newsletter. Visit the Advertising and Privacy Law Resource Center for update information on key legal topics relevant to advertising and marketing, privacy, data security, and consumer product safety and labeling.

Welcome to our monthly digest of litigation and regulatory highlights impacting the personal care product and dietary supplement industry.  April saw a re-emphasis on restriction of COVID-related claims in advertisements for supplements and therapies, developments in various class action cases, including a win for consumers challenging hand sanitizer’s claims of killing 99.99% of germs and a slew of new “natural” class actions, and finally a roller coaster ride for the FTC involving major blows and power moves.

Let’s take a look….

NAD

NAD determined that certain advertising claims made by Zarbee’s, Inc. for its cough products sufficiently identify that honey is the source of the cough soothing benefit and would not reasonably mislead consumers as to the reason for the product’s cough soothing efficacy. However, NAD found that other claims, which could reasonably suggest that the cough soothing benefit was attributable to multiple ingredients, and recommended modification to clarify that the cough soothing benefit is attributable to the honey and not the combination of main ingredients.  The efficacy of honey to soothe coughs was not at issue.

Supplement maker First Day Life, Inc., voluntarily discontinued a number of claims relating to its Daily Enrichment Vitamin, which were challenged by the Council for Responsible Nutrition.  The challenged claims focused on nutritional deficiencies as the cause of a broad range of childhood behavior, including picky eating, distraction, tantrums, and hyperactivity.  In addition to being a good reminder of the health claims substantiation requirements, i.e., competent and reliable scientific evidence, this case is notable because several of the claimed benefits were also tied to specific timeframes, e.g., improvement in 30 days or 45 days, which also requires substantiation.

Side-stepping from products used on the body to consumer health products used in the home, NAD examined claims made by NuWave, LLC, relative to its OxyPure Air Purifier product.  Claims included:

  • The claim on the advertiser’s website, “Remove airborne coronavirus by 99.999%*” with a bottom-of-the page disclaimer stating “*The University of Minnesota tested the OxyPure’s removal of the porcine respiratory coronavirus, a surrogate for SARS-CoV-2, the coronavirus that causes COVID-19”; and
  • A YouTube video advertisement which touts the product as removing “virtually all indoor air pollutants” and notes, in relevant part, that “[a]sthma and allergies are at an all-time high. Sleeping problems are epidemic and carry their own health risks. Airborne pathogens, viruses, bacteria and mold are not far behind” (simultaneously showing a map of the world with the words “AIRBORNE VIRUSES” and lines originating from China to various cities around the world showing the spread of “airborne viruses”).

NAD was “concerned that consumers who viewed the advertiser’s website would reasonably take away the message that OxyPure Air Purifier is effective in killing 99.999% of COVID-19 without seeing the disclosure that testing of the product was on a coronavirus surrogate. NAD was similarly concerned that the challenged YouTube video communicates that the OxyPure Air Purifier is effective in removing airborne pathogens and viruses, and that the visual of the world map conveys the implied claim that the product is effective against COVID-19.”

The advertiser agreed to modify its website advertising to state: “OxyPure is Calculated to Remove 99.999% of Coronavirus Surrogate from the Air in Areas up to 1,200 Square Feet in 6 Hours!* which is qualified by a clear and conspicuous disclosure directly underneath the claim, stating that “SARS-COV-2 was not used in the study conducted by the University of Minnesota for the efficacy of NuWave OxyPure.”  The advertiser also agreed to reach out to its affiliate to modify the YouTube video to remove the frame that features the aforementioned map and the onscreen and audio reference to “airborne viruses” to avoid conveying the unsupported message that OxyPure Air Purifier is effective in killing 99.999% of COVID-19.

Also of interest was NAD’s challenge against New York Presbyterian Hospital relative to the Hospital’s pre-COVID advertising campaign.  NAD challenged claims such as “Best survival rates of any U.S. hospital” and the use of testimonials that NAD was concerned conveyed that patients facing a serious prognosis will achieve a better outcome at New York Presbyterian than at other hospitals.  The Hospital modified the campaign in response to the challenge and NAD ultimately administratively closed the matter given the pandemic-related extenuating circumstances.  The case serves as an important reminder about the unique relationship between healthcare providers and patients and the power that such claims may have in the market, particularly in the context of a pandemic.

FTC

April was a very busy and gut-wrenching month for the FTC.

In a stunning blow to the FTC’s enforcement authority, the Supreme Court unanimously ruled in AMG Capital Management v. FTC that Section 13(b) of the FTC Act does not allow for the recovery of restitution, disgorgement, or any form of equitable monetary relief.  Despite decades of final orders awarding, and settlements in which defendants agreed to pay, substantial monetary relief, Justice Breyer explained that the statute’s emphasis on whether a defendant “is violating, or is about to violate, any provision of law enforced by the” FTC reflects a focus on “relief that is prospective, not retrospective.” Accordingly, the Court found that Section 13(b) was designed to “stop[] seemingly unfair practices from taking place while the Commission determines their lawfulness,” not to compensate consumers for alleged economic harm.  Courts and litigants across the country quickly reacted to the decision, with the Ninth Circuit vacating a preliminary injunction that had previously been entered to preserve the defendant’s assets to satisfy a potential award of monetary relief and defendants filings motions for judgment on the pleadings to dismiss the FTC’s claims for monetary relief.  AMG is not the final word on the issue, though, and a number of legislative efforts are underway to restore the agency’s enforcement authority.  While there appears to be support for legislative action on both sides of the aisle, Republicans are advocating for a more  measured statute that would restore the FTC’s ability to obtain monetary relief while ensuring the due process rights of those affected, including the imposition of a statute of limitations and a specific direction that the statute only be applied to cases filed after its enactment instead of being applied retroactively to past and pending cases.  We will continue to report on the judicial and legislative developments resulting from the AMG decision.

Despite all the turmoil, the FTC did take some action in other areas in April.  As we reported earlier this month, the FTC filed its first case under the COVID-19 Consumer Protection Act, which gives the agency authority to seek civil penalties for deceptive COVID-related acts and practices.  The new complaint alleges that, despite prior receipt of a letter warning of unsubstantiated COVID-19 efficacy claims, chiropractor Eric Anthony Nepute and his company Quickwork LLC deceptively marketed vitamin D and zinc products under the “Wellness Warrior” brand for the treatment, prevention, and cure of COVID-19.

The FTC also sent out 30 warning letters to companies regarding concerns about their COVID-related advertising claims. These letters were sent after the effective date of the COVID-19 Consumer Protection Act, and thus warn advertisers that anyone who makes deceptive claims about the treatment, cure, prevention or mitigation of COVID-19 is subject to civil penalties of up to $43,792 per violation. In response to these letters, it appears that all 30 companies have removed the claims that were identified as questionable. It is also important to note than in these letters a number of platforms including Facebook and Youtube were mentioned in the cc: field, indicating that some of the recipients’ deceptive claims had run on these platforms at some point. Despite the fact that these letters were sent to 30 companies directly, all advertisers should take note of this loud and clear warning from the FTC.

Shifting gears from COVID-related matters, the FTC’s settlement with BASF and DIEM Labs suggests that the FTC is holding firm to its position that post hoc analysis of clinical studies is not sufficient claim substantiation.  The settlement concerns Hepaxa and Hepaxa PD, fish oil products marketed to treat Non-Alcoholic Fatty Liver Disease (NAFLD). The FTC alleged that BASF, the maker of the Hepaxa products; DIEM Labs, the exclusive US distributor of the products; and two DIEM Labs executives claimed without substantiation that Hepaxa reduces liver fat.

In general, advertisers must possess competent and reliable scientific evidence to substantiate health claims. With respect to Hepaxa, the FTC did not dispute that the defendants had conducted a “randomized, double-blind human clinical trial designed to evaluate whether Hepaxa . . .  reduces liver fat in adults with NAFLD” or that they based their claims on results from the trial. The problem, according to the FTC, was that the clinical trial as constructed was unsuccessful. During the trial, 81 participants took Hepaxa and another 86 took an olive oil placebo. At the trial’s end, MRI data did not show a statistically significant reduction in liver fat for Hepaxa patients as compared to placebo patients. The FTC alleged that the defendants then engaged in a post hoc analysis to salvage the trial by identifying a subset of participants with some type of positive result. Ultimately, the defendants moved away from MRIs, grouped participants based on their Fatty Liver Index scores, and identified a statistically significant effect among participants with scores above 40—a subset containing five Hepaxa patients.

Because this case resulted in a settlement, it does not modify or create law. However, settlements are important markers of the FTC’s thinking, and the FTC’s four commissioners all voted to approve this settlement. It is notable, then, that the complaint contains the categorical assertion that results from post hoc analyses are “exploratory, at best” – an assertion that is notably absent from the FTC’s own Advertising Guide for the Dietary Supplement Industry.  As this statement shows, the FTC expects claims based on trial results to reflect the scope and design of the study as initially planned as opposed to statistically significant data identified after the trial has ended.

Finally, while the FTC’s desire to hold individuals accountable for corporate violations of the FTC Act is no longer news, the allegations included in a complaint shed light on what conduct the FTC believes supports liability—and whom it is willing to hold liable. Here, the FTC sued DIEM Labs’ co-owner/CEO, but it also sued DIEM Labs’ Director of Sales, alleging that he was directly involved in identifying alternative analyses of the clinical trial, helped create advertising for Hepaxa, and claimed at conferences that Hepaxa successfully treats NAFLD. Individual liability can rest on control or authority to control corporate acts, as is commonly seen in allegations against owners or CEOs. But it can also rest on direct participation, and this settlement demonstrates the FTC’s willingness to sue key actors—not just CEOs or owners—for corporate violations of the FTC Act.

Class Action Decisions and Settlements

A class of California consumers alleging that CVS brand hand sanitizer failed to live up to its promise of killing 99.99% of germs was certified by a judge in the Central District of California.  The plaintiff’s motion referenced the deposition of a purported microbial expert, who testified that the sanitizer does not kill 99.99% of the germs, and a purported marketing expert, who testified that consumer would find the claim material when deciding whether to purchase the product.  The Court found that all of the requirements of Rule 23 had been met, and that the survey proposed by plaintiff’s damages expert was adequate for purposes of class certificationSee Mier v. CVS Health.  Ironically, this decision came nearly two months after a judge in the Southern District of California dismissed a similar complaint in Moreno v. Vi-Jon, Inc., which alleged that Vi-Jon’s hand sanitizer products did not kill 99.99% of germs.

A proposed settlement we reported on last month involving Bayer Healthcare and Beiersdorf’s Coppertone “mineral based” sunscreen products was denied preliminary approval by a judge in the Northern District of California.  The Court found that the settlement, which provided for a $2.50 refund per unit purchased and injunctive relief, contained a number of flaws.  First, the Court was concerned about the scope of the release provision.  Contrary to Ninth Circuit precedent, which requires releases in a class action settlement to be limited to claims based on the identical factual predicate of the litigation, the proposed release extended to all claims that “were or could have been asserted in the Litigation.”  The Court also found that the settlement inappropriately released unnamed subsidiaries, successors, and other parties that class members would not be able to identify.  Second, the Court wanted to know more about the parties’ relationship with the cy pres beneficiary, Look Good Feel Better, and asked them to explain why there was no collusion or conflict of interest.  Third, the Court questioned the parties’ request for $530,000 in class administration expenses and the plaintiffs’ request for attorneys’ fees in an amount equaling one-third of the total settlement fund.  The Court required that any subsequent motion for preliminary approval explain why the Court should depart from the Ninth’s Circuit’s 25% benchmark for attorneys’ fees.  Finally, the Court found that the proposed class notice and claim form were insufficient insofar as they failed to comply with the Northern District’s class action settlement guidelines.  The Court denied the motion for preliminary approval without prejudice, and set a case management conference for the end of May.

New Class Action Filings/Trends

We saw a number of new “natural” filings in April.  One such complaint was filed in the Western District of Pennsylvania alleging that JM Brands LLC’s Purezero “natural” shampoo products contained a number of components derived from synthetic means (such as emulsifiers and fragrances).  The other complaints were all filed in New York State Court and include allegations that: (1) Raw Elements USA’s “natural” sunscreen and moisturizing products contain synthetic ingredients (including zinc oxide, tocopheryl acetate and sodium chloride); (2) Force Factor, LLC’s Somnapure Natural Sleep Aid contains non-natural synthetic ingredients; (3) Plant Health Inc.’s Highland Farms “natural” or “all natural” CBD gummies, moringa capsules and bath bombs contain synthetic ingredients (including citric acid, sodium citrate, potassium citrate, and sodium bicarbonate); and (4) The Country Butcher and Jones Natural Chews (dog snacks and bones) contain synthetic ingredients.

Following up on last month’s trends, there were two new cases filed against The Proctor and Gamble Company in April challenging “activated charcoal” and “gum repair” claims with respect to its toothpaste products, and  seven new complaints involving Elanco Animal Health Inc.’s Seresto flea and tick products.

See you next month

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Subscribe here to Kelley Drye’s Ad Law Access blog and here for our Ad Law News and Views newsletter. Visit the Advertising and Privacy Law Resource Center for update information on key legal topics relevant to advertising and marketing, privacy, data security, and consumer product safety and labeling.

 

Key Developments in CCPA Litigation for Q1 2021As we move deeper into the second year of CCPA litigation, the substantive issues continue to develop and we remain focused on the patterns and implications of recent filings and rulings.  In this post, we highlight notable developments in three cases that occurred in the first quarter of 2021.  These cases raise significant issues regarding judicial interpretation of the private right of action in the CCPA, the definition of a “data breach,” and CCPA plaintiffs’ ability to access pre-complaint discovery.

CCPA Claim Dismissed For Lack Of Data Breach Allegations

On August 5, 2020, Plaintiff filed a class action complaint against Defendants Alphabet, Inc. and Google, LLC in the Northern District of California.  Plaintiff alleged that Defendants monitored and collected Android Smartphone users’ sensitive personal data without those users’ consent when they interacted with non-Google applications on their smartphones.  Plaintiff’s CCPA cause of action was based on Defendants’ failure to disclose these activities in violation of Cal. Civ. Code § 1789.100(b).  Plaintiff’s proposed class definition included “All Android Smartphone users from at least as early as January 1, 2014 through the present.”

On September 30, 2020, Defendants moved to dismiss the CCPA claim, arguing that (1) Plaintiff failed to allege that his information was subject to a data breach; and (2) Plaintiff, as a New York resident, had no standing under the CCPA, which only provides relief to California residents.

On February 2, 2021, the court dismissed the CCPA claim with prejudice, finding that the complaint did not allege that any personal information was subject to unauthorized access as a result of a security breach.  The court reasoned that the CCPA only conferred “a private right of action” for violations related to “personal information security breaches,” and that Plaintiff was therefore unable to state a claim.  The court also observed that Civil Code § 1798.150(c) explicitly states that “[n]othing in this title shall be interpreted to serve as the basis for a private right of action under any other law.”  McCoy v. Alphabet, Inc., No. 20-CV-05427-SVK, 2021 WL 405816 (N.D. Cal. Feb. 2, 2021).

On February 16, 2021, Plaintiff filed an Amended Complaint that alleges a violation of California’s Unfair Competition Law (“UCL”) using the alleged CCPA violation as a predicate.  It will be relevant to follow how the court addresses Plaintiff’s attempt to transform his dismissed CCPA claim into a UCL claim, in light of the court’s observation that the CCPA does not provide a basis for a private right of action under other laws.

McCoy v. Alphabet, Inc. et al., 5:20-cv-05427 (N.D. Cal.).

Plaintiffs Allege Numerous, Individualized “Data Breaches”

On April 1, 2021, Plaintiffs filed a Consolidated Class Action Complaint against Bank of America in the Northern District of California.  Plaintiffs allege that Bank of America issued Visa debit cards containing public benefit disbursements to recipients, including Plaintiffs and other members of the class, that were purportedly prone to breaches because the cards utilized outdated magnetic stripe technology, rather than the EMV chips that have allegedly become the industry standard due to improved security features.  Plaintiffs’ CCPA cause of action alleges that as a result of the inadequate security safeguards, the cardholders suffered unauthorized access and disclosure of their personal information that resulted in their funds being stolen through unauthorized transactions.

The statutory language of the CCPA indicates that a claim must be connected to a data breach.  Cal. Civ. Code § 1789.150.  Unlike most cases, Plaintiffs do not allege that a single, centralized data breach occurred.  Instead, Plaintiffs allege that individual data breaches of each cardholder were permitted by Bank of America’s card design.  This theory raises questions about what qualifies as a data breach under the CCPA and whether the design of a consumer product that renders the product vulnerable to breach, followed by actual breaches, qualifies.  A judicial determination of this issue could help determine the scope of similar consumer actions.

Yick v. Bank of America, N.A., 3:21-cv-376 (N.D. Cal.).

Defendant Compelled To Disclose Information Related To Data Breach Investigations 

On April 16, 2021, Plaintiffs filed a redacted Consolidated Class Action Complaint against Blackbaud, Inc. in the District of South Carolina.  Plaintiffs allege that Blackbaud provides data security services for sensitive information, and that Plaintiffs and the class members are Blackbaud’s clients.  Plaintiffs’ CCPA cause of action alleges that as a result of a data breach, cybercriminals stole the sensitive private information that Plaintiffs entrusted to Blackbaud.

Of note, the early proceedings in this case have included the forced production of Blackbaud’s forensic report on the data breach.  The report was apparently compiled independent of the litigation and, upon learning of the report, the Court ordered Blackbaud to immediately produce the forensic report and allowed Plaintiffs to use that report in drafting a consolidated complaint.  This is an issue that we’ve explored previously (here and here).  Companies need to be vigilant and deliberate in how they approach the issue of internal investigations concerning data breaches where litigation could arise.

In re Blackbaud, Inc., Customer Data Breach Litigation¸ 3:20-mn-02972-JMC, MDL No. 2972 (D.S.C.).

As these and other CCPA-related cases progress through the litigation stages, we will continue to provide updates.  Our prior summaries of CCPA-related litigation can be found in our CCPA Litigation Round-ups for:  Q1 2020, Q2 2020, and Q3 & Q4 posts. We will continue to report on relevant developments in CCPA litigation and provide updates in our CCPA Litigation Tracker.

If you have any questions about defending and/or preparing for a potential privacy consumer class action, please reach out to our team, and if you have questions on your privacy compliance strategy, please reach out to our privacy compliance team.

On the latest episode of the Ad Law Access Podcast, Kelley Drye Partner Alysa Hutnik and Robert Cunningham, Head of Legal, at Ketch discuss the state of privacy, tracking, compliance technology and tools, and strategies privacy lawyers and others can use to help do their jobs. As you would expect, there are some practical tips to take away. Listen here or wherever you get your podcasts.

Privacy Compliance Tech-Tools and StrategiesWith AdTech (tracking individuals and their online or in app behaviors to build a profile of them to better serve and more effectively target them) and MarTech (strategies and technologies to generate demand, attention, and sales for a product) now the most celebrated or perhaps infamous areas in privacy today, being a privacy lawyer has changed dramatically in just a few years. Privacy lawyers are not only counseling and guiding companies along the lines of what they need to do from a legal perspective but there’s an element of what should be done from an ethical or social perspective as well. Finding a coherent thread through all of the requirements and keeping track of all the technological changes in what is now a very tech heavy business is difficult.

Kelley Drye Partner Alysa Hutnik and Robert Cunningham, Head of Legal, at Ketch discuss the state of privacy, tracking, compliance technology and tools, and strategies privacy lawyers and others can use to help do their jobs. As you would expect, there are some practical tips to take away.

Find the episode on Apple Podcasts, Google Podcasts, Amazon Podcasts, SoundCloud, or wherever you get your podcasts.

Contact:

Alysa Z. Hutnik
ahutnik@kelleydrye.com
(202) 342-8603

Robert Cunningham
robert@ketch.com
(510) 292-0647

For additional information, please visit:

  • Key Developments in CCPA Litigation for Q1 2021– As we move deeper into the second year of CCPA litigation, the substantive issues continue to develop and we remain focused on the patterns and implications of recent filings and rulings.  In this post, we highlight notable developments in three cases that occurred in the first quarter of 2021.  These cases raise significant issues regarding judicial interpretation of the private right of action in the CCPA, the definition of a “data breach,” and CCPA plaintiffs’ ability to access pre-complaint discovery.
  • Advertising and Privacy Law Resource Center – Kelley Drye has organized this Advertising and Privacy Law Resource Center to help your company navigate the legal landscape. While this  site is not exhaustive, it addresses key legal topics relevant to advertising and marketing, privacy, data security, and consumer product safety and labeling. Feel free to contact us to discuss any specific claims, privacy or data security practices, or for any other questions.
  • Ad Law Access Blog – Updates on consumer protection trends and developments from the Advertising Law and Privacy Law practices
  • Privacy and Information Security Practice Group Page

 

Congressional Democrats Sound the Alarm, Rally In an Effort to Restore Pre-AMG 13(b) Enforcement AuthorityYesterday, less than a week after the Supreme Court’s unanimous decision in AMG Capital Management v. FTC, two Congressional committees zeroed in on the FTC’s hollowed-out Section 13(b) authority, the fate of which now lies squarely with Congress. Leading Democrats in both chambers have expressed the urgent need for legislation to clarify and strengthen the statute in AMG’s wake. As stated by House Energy and Commerce Committee Chairman Frank Pallone (D-NJ) on Tuesday, “What my colleagues and I have been saying for over a year was a problem is now an emergency.” Republicans, on the other hand – while sympathetic to the FTC’s plight – are increasingly advocating for “guardrails” to prevent unbounded use of the agency’s Section 13(b) authority, should it be restored.

On the House side, the Energy and Commerce Committee’s Subcommittee on Consumer Protection and Commerce held a legislative hearing on H.R. 2668, the Consumer Protection and Recovery Act, introduced last week by Representative Tony Cárdenas (D-CA). As we wrote previously, H.R. 2668 would amend 13(b) to explicitly authorize the FTC to seek permanent injunctions and other equitable relief. Acting FTC Chair Rebecca Slaughter, who was the hearing’s sole witness for more than two hours Tuesday, hailed the Cárdenas proposal as “clear and straightforward legislation that would affirm Congress’s intent that the FTC be able to go to federal court to stop bad conduct, disgorge ill-gotten gains, and provide restitution.” Acting Chair Slaughter and several key Democrats brushed aside arguments that the agency has other enforcement tools (e.g., Section 19), suggesting there is no substitute for 13(b) in terms of both scope and consumer relief.

Hours earlier, Senate Commerce Committee Consumer Protection, Product Safety, and Data Security Subcommittee Chair Richard Blumenthal (D-CT) kicked off a hearing on COVID-19-related fraud by highlighting the need to “restore 13(b) authority that was taken away by the Supreme Court when it caved to a shadowy campaign to disarm the FTC.” While Senate Commerce Committee Democrats have yet to put forward legislative text, their reaction to AMG not-so-subtlety suggests they favor granting the agency broad authority to seek injunctive and monetary relief under Section 13(b). In the Senate hearing, Acting Director of the FTC’s Bureau of Consumer Protection Daniel Kaufman lamented the Supreme Court’s decision, noting that it will “dramatically curtail the ability of the FTC to effectively protect consumers.”

In Tuesday’s parallel hearings, Acting Chair Slaughter and Acting Director Kaufman advocated for a return to the FTC’s decades-long interpretation of its 13(b) authority, now invalidated by the Supreme Court. In pressing for expeditious action, they both highlighted the dozens of pending 13(b) cases involving fraudsters and scammers representing upwards of $2.4 billion in consumer redress potential.   Unfortunately, however, very little air time was dedicated to the question that should have been at the center of yesterday’s day on the Hill.

It is not surprising that Tuesday’s testimony, which sounded the alarm regarding the consumer harm posed by “fraudsters” and “scammers,” captured the attention of lawmakers.  After all, there is no lobby for companies engaged in fraudulent activity and there should be no sympathy from either side of the aisle for obvious bad actors.

As the Supreme Court made clear in its unanimous decision, however, Section 13(b) was not intended to be used as the FTC has used it for the past 40 years.  While a legislative fix could provide the FTC with what it needs to combat dishonest or fraudulent conduct, the real question is whether Congress should go any further.  In deciding issues of claim substantiation, for example, why isn’t the FTC’s existing Section 19 authority adequate when there is a legitimate difference of opinion on whether there is a reasonable basis for a claim?   This authority has almost entirely been ignored, contrary to what was intended when the law was originally drafted by Congress.

It is disappointing that the congressional committees did not spend more time considering this issue, although there was some critical attention focused on other aspects of the bill.  During Acting Chair Slaughter’s testimony, Representative Kelly Armstrong (R-ND) expressed due process concerns stemming from the application of any newly-granted authorities to pending federal court cases.  Notably, in contrast to the Cárdenas bill, a 13(b) fix put forward by Republican Senator Roger Wicker (R-MS) during the last Congress would only apply to agency proceedings commenced post-enactment.

More broadly, several House Energy and Commerce Committee Republicans cautioned that the authority in the Cárdenas proposal should be more narrowly targeted. In addition to concerns with the bill’s 10-year statute of limitations, they questioned its broad application, potentially ensnarling legitimate businesses and products rather than targeting outright fraudulent acts. During the hearing’s second panel, Republicans were receptive to an approach offered by former Bureau of Consumer Protection Director Howard Beales, who argued that “Congress should explicitly authorize the Commission to pursue equitable relief under Section 13(b), subject to the substantive standards set forth in Section 19” and, further, that Congress should dictate the standards for when monetary relief is appropriate.

Energy and Commerce Committee Chairman Pallone concluded his opening remarks Tuesday by encouraging his Republican colleagues to work toward a bipartisan solution; whether Democrats will accept any tweaks to a bill so enthusiastically endorsed by the FTC’s Acting Chair remains an open question. Those hoping for additional guardrails may have more luck in the Senate, where action is notoriously slower and the threat of the legislative filibuster can drive bipartisan negotiations and, occasionally, consensus.

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Join us Thursday, April 29 for Tips from the Experts – Defending TCPA Lawsuits – Using Data Analysis Strategies and Support. If you communicate with clients and prospects through phone call, text message, or fax campaigns, you are certainly familiar with the Telephone Consumer Protection Act (TCPA) that applies to these and other areas of direct marketing and consumer contacts. With more than 3,000 TCPA individual and class action lawsuits being levied each year, the business risks and potential for significant monetary exposure have greatly increased.

Join Kelley Drye and CompliancePoint as we discuss how to use data to defend your company from TCPA suits when they do arise and how to work with your legal team.

Register here

Ninth Circuit Moves Quickly to Apply AMGThe 13(b) dominoes are beginning to fall. Last week, a unanimous AMG Court found that Section 13(b) does not allow for monetary remedies. A panel of the Ninth Circuit, in Federal Trade Commission v. Cardiff et al, quickly took that decision to heart.

In a brief, three-paragraph order, the per curiam panel vacated the district court’s preliminary injunction order, that had been entered into “to preserve assets pending a final judgment that could include equitable monetary relief in this action under § 13(b) of the FTC.” Because “the Supreme Court unanimously held that §13(b) as currently written does not grant the Commission authority to obtain equitable monetary relief,” the Ninth Circuit vacated the injunction, remanding the case to the district court “for further proceedings consistent with the Supreme Court’s decision in AMG Capital Management.”

While this is the first Circuit Court order we are aware of to apply AMG to a pending case, it will certainly not be the last. We expect to see many similar remands and vacations in the days and weeks to come.

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Join us Thursday, April 29 for Tips from the Experts – Defending TCPA Lawsuits – Using Data Analysis Strategies and Support. If you communicate with clients and prospects through phone call, text message, or fax campaigns, you are certainly familiar with the Telephone Consumer Protection Act (TCPA) that applies to these and other areas of direct marketing and consumer contacts. With more than 3,000 TCPA individual and class action lawsuits being levied each year, the business risks and potential for significant monetary exposure have greatly increased.

Join Kelley Drye and CompliancePoint as we discuss how to use data to defend your company from TCPA suits when they do arise and how to work with your legal team.

Register here

Lina Khan Confirmation Hearing Signals Potential Big Changes for FTC  Lina Khan’s nomination to be an FTC Commissioner took an important step forward on April 21 with her testimony before the Senate Commerce Committee. Unsurprisingly, Khan’s testimony underscored her interest in ramping up antitrust scrutiny of large internet platforms.

Khan first rose to prominence in the antitrust world with the publication of her article Amazon’s Antitrust Paradox in the Yale Law Journal in 2016. Khan argues that antitrust standards based on consumer welfare – measured primarily through prices consumers pay – are ill-equipped to protect competition in the digital economy, and have allowed Amazon to become the “titan of twenty-first century commerce.” Her analysis finds that measures of price and output do not serve as effective signals of competition, and focusing on these signals allows predatory pricing and similar strategies to evade enforcement scrutiny. Khan further argues for returning to a greater focus on market structure and how a company’s structural role may inhibit competition. Some members of the Commerce Committee praised Khan’s work, but critics have labeled it as a form of “hipster antitrust” because of its support for reviving doctrines that prevailed in the 1960s (and earlier).

In her opening statement before the Committee, Khan detailed her experience over the last ten years documenting, observing, and analyzing competition issues as a journalist and legal scholar. She emphasized her experience serving as Counsel to the House Antitrust Subcommittee, where she drafted the section of the House Investigation of Competition in Digital Markets Report detailing the rise of Google’s market position in online search and advertising . The House Report concluded that Google leveraged its search dominance through self-preferencing, data misappropriation, raising its costs for market access, and other tactics to weaken competition. The Report warns that, “absent interventions,” barriers to entry and network effects are likely to help protect Google from competition.

During her Commerce Committee hearing, Khan stated that the FTC should closely examine the conduct of technology companies and suggested that allegations in recent lawsuits indicate “potential criminal activity” in digital ad markets. Khan’s testimony also highlighted the privacy impacts, observing that the business model of online advertising itself may be antithetical and possibly harmful to privacy law, and noting that ”companies may treat privacy law violations simply as the cost of doing business.”

Khan’s nomination is just one of the moving pieces at the FTC.  President Biden has yet to name a permanent Chair.  Commissioner Rohit Chopra has been nominated as Director of the CFPB, and his departure would create another vacancy on the Commission.  We will continue to closely monitor developments with Khan’s and other FTC nominations, as the leadership picture in key agencies become clearer.

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Subscribe here to Kelley Drye’s Ad Law Access blog and here for our Ad Law News and Views newsletter. Visit the Advertising and Privacy Law Resource Center for update information on key legal topics relevant to advertising and marketing, privacy, data security, and consumer product safety and labeling.

Now that the Supreme Court has decided AMG Capital Management, LLC v. Federal Trade Commission (regardless of your rooting interests, quite a day, eh?) all eyes turn toward Congress, as it considers whether to amend Section 13(b) of the FTC Act.  As we explained yesterday, in AMG, the Supreme Court definitively (9-0) held that the current text of the statute only allows for injunctive relief.

While the official line is that the FTC does not lobby Congress, the Agency is making its preferences known. In the words of Acting Chairwoman Rebecca Kelly Slaughter:

In AMG Capital, the Supreme Court ruled in favor of scam artists and dishonest corporations, leaving average Americans to pay for illegal behavior. . . . With this ruling, the Court has deprived the FTC of the strongest tool we had to help consumers when they need it most. We urge Congress to act swiftly to restore and strengthen the powers of the agency so we can make wronged consumers whole.

Putting aside issues with this characterization, there can be no doubt that the FTC is actively and aggressively seeking explicit allowance of monetary remedies. But the possibility of a legislatively revitalized Section 13(b) in the near future raises some big questions. Here’s one: if Congress amends Section 13(b) to explicitly allow for monetary remedies, would the FTC be able to use the new legislative language to pursue monetary remedies against companies whose alleged wrongful actions pre-dated the statutory change?  For defendants in the approximately 75 pending federal court cases alleging Section 13(b) violations, this is a very important question.

Without a clear statutory provision providing for retroactive liability, it is highly unlikely that the courts would allow the FTC to use the new statutory language to “look back” at actions committed prior to the newly enacted legislation’s codification date. The Supreme Court has repeatedly affirmed that, in the absence of a clear statutory intent, there is a generally applicable presumption against retroactivity, in which courts “presume that the [new] statute does not apply to [prior] conduct.” Martin v. Hadix, 527 U.S. 343, 352 (1999). The Supreme Court has raised serious Constitutional concerns regarding the retroactive imposition of burdens or obligations on parties based on newly enacted statutory provisions. Due to those concerns, in 1994, the Supreme Court in Landgraf v. USI Film Prods, 511 U.S. 244, established a two-part test to determine whether new statutory language may apply retroactively.

Under the Landgraf test, courts first look to see if the statute facially applies retroactively. If the statute is silent as to its retroactive reach, the court must examine whether the statute’s retroactive application “takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past.” Id. at 269.

The Landgraf Court specifically referenced “a statute introducing damages liability” as the type of statute that courts should not apply retroactively. Id. at 285 n. 37. The point of any new Section 13(b) would, of course, be to do just that, introducing new “damages liability” for conduct that previously would only have occasioned injunctive relief.

Parties currently at odds with the FTC over past practices can take some comfort in the Supreme Court’s language in Landgraf. If Congress amends the statute and does not include an express retroactive provision, parties arguing that the new law should not apply to their past conduct will have the better argument.

The question becomes more thorny if the new legislative language explicitly calls for retroactive applicability, which the House bill introduced by Representative Tony Cardenas (D-CA) expressly does. But, if Representative Cardenas’s proposed expansive language is adopted, while the statute’s text would be clear as to retroactivity, its constitutionality would not be. Even where a retroactivity provision is expressly incorporated in a statute, the Supreme Court in Landgraf explained that the Constitution’s “Due Process Clause [] protects the interests in fair notice and repose that may be compromised by retroactive legislation.” Id. at 266.

While any retroactive statutory changes would implicate due process, imposing monetary penalties retroactively is arguably the clearer Due Process violation, because the legislative change directly implicates a taking of property without due process. The Supreme Court’s dictum that “a justification sufficient to validate a statute’s prospective application under the [Due Process] Clause may not suffice to warrant its retroactive application” should be applicable in this instance. See Landgraf, 511 U.S. at 266.  In the face of this due process challenge, the FTC will likely be required to show that a company was on “notice” that there may have been a monetary obligation for the conduct at issue when the conduct occurred.

Of course, the FTC will argue that, when the conduct occurred, there had been 40 years of case law in their favor, which put companies that are currently litigating under Section 13(b) on notice.   This argument is not as strong as it seems at first glance.  Can a company be on notice when the plain language of the statute does not allow for monetary remedies? Aren’t companies entitled to rely on the plain language of the statute as interpreted by the highest court in the land, notwithstanding that lower courts have gotten it wrong for decades? This is an issue that will be front and center for companies currently in litigation with the FTC under Section 13(b).

And while the outcome of any such constitutional challenge may be unclear, what is clear is that any legislation purporting to retroactively establish monetary liability, when the Supreme Court in AMG so clearly held that the prior statutory language could not establish such liability, will be challenged. Thus, while AMG clarified the current ambit of 13(b), the role of the courts in establishing the contours of a future 13(b) is likely far from over.

Of course, the constitutional issue posed by retroactivity will not ripen without a revised Section 13(b); as any congressional observer should know, new legislation is uncertain.  From Politico this morning:

An aide for Republicans on the House Energy and Commerce Committee signaled there’s already some partisan bickering over the upcoming hearing and how to address the [13(b)] issue through legislation. “A 9-0 vote by the Supreme Court sends a clear signal that the FTC did not use their authorities in the most effective means to seek restitution,” the aide said. “It is unfortunate when Committee Democrats will not let all commissioners appear before the Energy and Commerce Committee to discuss a consensus solution.”

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Subscribe here to Kelley Drye’s Ad Law Access blog and here for our Ad Law News and Views newsletter. Visit the Advertising and Privacy Law Resource Center for update information on key legal topics relevant to advertising and marketing, privacy, data security, and consumer product safety and labeling.

 

This morning, the Supreme Court released its long-awaited opinion in AMG Capital Management v. FTC. Judge Breyer issued the decision for a unanimous Court. As we had predicted following oral arguments, the Supreme Court found that Section 13(b) of the FTC Act does not allow for monetary remedies.

The Court’s conclusion, stated at the outset, is straightforward and unambiguous: “The question presented is whether th[e] statutory language” allowing the FTC to seek injunctive relief “authorizes the Commission to seek, and a court to award, equitable monetary relief such as restitution or disgorgement. We conclude that it does not.”

The first half of Justice Breyer’s AMG opinion details a history of the FTC’s enforcement capabilities. Justice Breyer points out that, historically, the FTC’s use of Section 13(b) to obtain monetary remedies is an aberration. To the contrary, “[e]ver since the Commission’s creation in 1914, it has been authorized to enforce the Act through its own administrative proceedings.” It was only in the late 1970’s that the FTC started using Section 13(b) “without prior use of the administrative proceedings in §5.” While the FTC argued that its use of 13(b) to obtain monetary relief was a necessary norm, Justice Breyer’s thorough review of the historical record shows that that is not the case.

Whether or not the FTC’s use of Section 13(b) to bypass administrative proceedings and go directly to Federal Court is good policy, the unanimous Court concluded that it is not good law. Most importantly, in reaching its decision, the Court noted that the statutory “language refers only to injunctions . . . An ‘injunction’ is not the same as an award of equitable monetary relief.” If that was not enough, the context of the statutory provision confirms that it does not extend to non-injunctive remedies. As Justice Breyer explained, “The language and structure of §13(b), taken as a whole, indicate that the words ‘permanent injunction’ have a limited purpose—a purpose that does not extend to the grant of monetary relief.”

Justice Breyer concluded that reading Section 13(b) the way the FTC seeks to would be illogical. By contrast, the logical textual reading is also the most coherent: “to read §13(b) to mean what it says, as authorizing injunctive but not monetary relief, produces a coherent enforcement scheme: The Commission may obtain monetary relief by first invoking its administrative procedures and then §19’s redress provisions (which include limitations). And the Commission may use §13(b) to obtain injunctive relief while administrative proceedings are foreseen or in progress, or when it seeks only injunctive relief. By contrast, the Commission’s broad reading would allow it to use §13(b) as a substitute for §5 and §19.”

Shortly after the Court released its opinion, Acting FTC Chairwoman Rebecca Kelly Slaughter issued a highly critical statement. Ignoring the historical record Justice Breyer relied on, Slaughter attempted to reframe the High Court’s decision as a victory for scammers. Slaughter’s press release is surely directed at Congress, where the FTC is already lobbying to reinvigorate Section 13(b), with circulated language that would, if adopted, increase the FTC’s 13(b) enforcement authority.

As the Supreme Court has now gutted Section 13(b), it will be up to Congress to revitalize the statutory provision with stronger enforcement mechanisms. Of course, Congress can also choose to do nothing. In that case, the FTC will have to take to heart the Supreme Court’s recommendation that it make more use of the traditional—and statutorily founded—administrative enforcement procedures found in Sections 5 and 19 of the Act.

It’s Earth Day! A perfect day to think about the FTC’s Green Guides, designed to help marketers develop claims about the environmental benefits of their products. The Green Guides address the following types of claims: (a) general environmental benefit claims; (b) carbon offset claims; (c) certifications and seals of approval; (d) “compostable” claims; (e) “degradable” claims; (f) “free-of” claims; (g) “non-toxic” claims; (h) “ozone-safe” and “ozone-friendly” claims; (i) “recyclable” and “recyclable content” claims; (j) “refillable” claims; (k) “renewable energy” claims; (l) “renewable materials” claims; and (m) source reduction claims.

The Green Guides describe the types of environmental claims the FTC may or may not find deceptive under Section 5 of the FTC Act. The FTC has brought  many actions related to green claims, including the recovery of $1.76 million regarding “organic” claims, and we expect that they will continue to bring these types of actions, particularly as the focus on climate change increases. Accordingly, advertisers should carefully review the new Guides and ensure that their green claims comply with the FTC’s standards.

You can find more on the Green Guides, environmental marketing claims, and other key advertising and marketing, privacy, data security, and consumer product safety and labeling legal topics on Kelley Drye’s Advertising and Privacy Law Resource Center.