Federal & State Regulatory

The California Food, Drug, and Medical Device Task Force announced a settlement this week with Goop, the lifestyle brand founded by Gwyneth Paltrow, which we’ve written about here and here. The complaint alleges that Goop made false and misleading representations regarding the effects or attributes of three products—the Jade Egg, Rose Quartz Egg, and Inner Judge Flower Essence Blend. According to the complaint, Goop advertised that the Jade and Rose Quartz Eggs—egg-shaped stones designed to be inserted vaginally and left in for various lengths of time—as well as the Inner Judge Flower Essence Blend could balance hormones, prevent uterine prolapse, increase bladder control and prevent depression. The complaint also alleges that none of Goop’s claims regarding these products were supported by competent or reliable scientific evidence.

The stipulated judgment prohibits Goop from (1) making any claims regarding the efficacy or effects of any of its products without possessing competent and reliable scientific evidence that substantiates the claims; and (2) manufacturing or selling any misbranded, unapproved, or falsely advertised medical devices. In addition, Goop agreed to pay $145,000 in civil penalties and will provide refunds to consumers who purchased the products during 2017.

Goop responded, in part, as follows: “Goop provides a forum for practitioners to present their views and experiences with various products like the Jade Egg. The law, though, sometimes views statements like this as advertising claims, which are subject to various legal requirements.”

Yep. True story. Here are a few other lessons:

  • When made on a site promoting sale of a product, statements by practitioners or other testimonialists about the benefits of that product are advertising (not sometimes, always) and can never be used to support claims that are not otherwise supported by competent and reliable scientific evidence.
  • Competent and reliable scientific evidence is a flexible standard. For health claims, though, it frequently requires well-designed clinical tests. Simply put, the standard isn’t whether there is any evidence; it is whether there is credible evidence that experts in the field would agree is reliable.
  • Fanciful claims that do not rise to the level of disease prevention aren’t necessarily puffery either. Advertisers need to clearly understand when they are making objectively provable claims and have an obligation to substantiate them before dissemination.
  • Products that feature claims of disease treatment or reduction may be classified as medical devices or drugs and may be subject to FDA clearance or approval prior to marketing.

Goop claims to have modified its claims to comply with the settlement. Notably, the Jade Egg remains available. We’ll let you decide what to do with that.

Yesterday, the California legislature passed SB-327, a bill intended to regulate the security of internet-connected devices.  Unlike the California Consumer Privacy Act (CCPA), SB-327 is significantly more narrow.  As enacted, the bill is a “lighter” version of what was first introduced and amended in 2017 (which, at that time, would have included certain disclosure and consent requirements for connected devices).

At its core, SB-327 requires connected devices to be equipped with “reasonable security features” that are:

  1. appropriate to the nature and function of the device;
  2. appropriate to the information it may collect, contain, or transmit; and
  3. designed to protect the device and any information contained therein from unauthorized access, destruction, use, modification, or disclosure.

Subject to the above, if a connected device is equipped with a means for authentication outside a local area network, this is considered a “reasonable security feature” if either: (a) the preprogrammed password is unique to each device manufactured; or (b) the device contains a security feature that requires a user to generate a new means of authentication before access is granted to the device for the first time. These requirements, of course, are in addition to any duties or obligations imposed under other laws (i.e., CCPA).

The term “connected device” is defined as “any device, or other physical object that is capable of connecting to the Internet, directly or indirectly, and that is assigned an Internet Protocol address or Bluetooth address.” Pretty much every device connected to the Internet is assigned either an IP address or Bluetooth address when it is connected. This can include, for example, anything from computers, tablets, and mobile devices, to smart watches, smart home hubs, or app-controlled toys.

The bill does not provide a private right of action. Only the Attorney General, a city attorney, a county counsel, or a district attorney can enforce the law, and the bill does not address (either directly or by implication) any specific penalties or remedies that may be sought by these entities. However, it’s possible that we see the requirement to implement reasonable security measures asserted as a basis for a legal duty in conjunction with other claims (either by the AG or consumers).

The bill was ordered to engrossing and enrolling. If signed by Governor Brown, the law would become effective on January 1, 2020 (same day as the CCPA).

As we enter the dog days of summer, the FCC continues to turn up the heat on equipment marketing enforcement. But while million dollar fines for marketing noncompliant devices capture the spotlight, the FCC also quietly issued a number of equipment marketing actions focused on a single type of device: LED signs. In just the last three months, the FCC has settled over ten investigations involving the marketing of LED signs used in digital billboards for commercial and industrial applications without the required authorizations, labeling, or user manual disclosures. Each action involved an entity that either manufactured or sold (or both) LED signs. The agency’s recent actions should be a shot across the bow to any retailer of LED signs to ensure that their devices are properly tested and authorized prior to sale. Otherwise, these companies may face significant fines and warehouses of unmarketable devices.

Most consumers might not think that LED signs fall within the FCC’s jurisdiction. However, the signs emit radio waves that can interfere with communications services. As a result, the FCC requires most LED signs and other “unintentional” radiators to be tested for compliance with its technical requirements prior to marketing. Importantly, the FCC’s rules prohibit the marketing of such devices unless they have been properly authorized, labeled, and carry the required disclosures. Even with the FCC’s recent efforts at simplification, the rules regarding equipment marketing are complex, requiring close attention to compliance at every step in the supply chain. Continue Reading Read the Signs: FCC Unleashes Wave of Equipment Marketing Actions Involving LED Signs

Kelley Drye introduces a new Full Spectrum series, “Inside the TCPA,” which will offer a deeper focus on TCPA issues and petitions pending before the FCC. Each episode will tackle a single TCPA topic or petition that is in the news or affecting cases around the country. In this inaugural episode, partner Steve Augustino and associate Jenny Wainwright discuss the definition of an autodialer or ATDS. This episode addresses the 2018 D.C. Circuit decision in ACA International and the FCC’s new proceeding to examine the definition. With initial comments filed on June 13th, Steve and Jenny analyze the principal arguments made by commenters and discuss whether Congress will weigh in on the matter. To listen to this episode, please click here.*

Future episodes of “Inside the TCPA” will tackle reassigned numbers, consent, and other topics raised before the FCC. This is a companion to Kelley Drye’s comprehensive list of petitions before the Commission available in our monthly TCPA Tracker newsletter. Please contact us if we can assist you with any of the FCC proceedings.

Kelley Drye’s Full Spectrum is available on iTunes. To subscribe, and keep up to date on the latest trends and topics in communications, simply find the built-in and undeletable podcast app, search “Kelley Drye Full Spectrum,” look for our logo, and hit “subscribe.”

You can also access the podcast through our website, Soundcloud, and Stitcher.

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FTC Commissioner Terrell McSweeny is scheduled to resign effective April 28 and may leave with acting Chairman Maureen Ohlhausen as the sole commissioner. Law360  published an article by partner John Villafranco and professor Stephen Calkins that discusses whether the FTC can take formal action by a 1-0 vote and when does a commission cease being a commission? To read the full article, please click here.

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

Background

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

The En Banc Court’s Analysis

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

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

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

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

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

Agency Response

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

Our Take

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Last week, CPSC Commissioner Joseph Mohorovic, one of the two Republicans on the five-person Commission, announced that he would be ending his term as Commissioner two years early to join the Federal Regulatory and Compliance practice at the law firm Dentons.  His last day at the Commission was October 20.  Mr. Mohorovic became a Commissioner in July 2014 and had commuted from Chicago during his tenure.  He cited a desire to spend more time with his family as the basis for his resignation.

In the short term, the Commission will have a 3-1 Democrat majority, but Dana Baiocco (R) has been nominated to fill the seat of Commissioner Marietta Robinson (D) as her term ends this month.  Once that nomination is confirmed, the Commissions would have two Republicans (Ms. Baoicco and Acting Chair Ann Marie Buerkle), two Democrats (Commissioners Robert Adler and Elliot Kaye), and one open slot.

On May 9, 2017, the U.S. Court of Appeals for the Ninth Circuit issued an order granting a Federal Trade Commission (FTC) request for rehearing en banc of the court’s earlier decision to dismiss an FTC case against AT&T Mobility over allegedly “unfair and deceptive” throttling practices in connection with wireless data services provided to AT&T’s customers with unlimited data plans.  In a brief order, Chief Judge Thomas noted that “[t]he three-judge panel disposition in this case shall not be cited as precedent by or to any court of the Ninth Circuit.”

The original Ninth Circuit decision was notable because it held that the “common carrier exemption” in section 5 of the FTC Act—which excludes common carriers from FTC jurisdiction—was “status based” rather than “activity based,” and as such AT&T was not subject to the FTC’s jurisdiction even for non-common-carrier activities.  The original decision had the effect of resetting the jurisdictional boundaries between the FTC and the Federal Communications Commission (FCC) and removing a wide swath of the telecommunications and technology ecosystem from the FTC’s jurisdictional reach.

In a statement, FCC Chairman Ajit Pai applauded today’s order, noting that it will make it “easier for the FTC to protect consumers’ online privacy” and “strengthens the case for the FCC to reverse its 2015 Title II Order,” which classified broadband Internet access service (BIAS) as a common carriage “telecommunications service” and established the FCC’s current open Internet rule framework.  The 2015 Title II Order is now the subject of a draft Notice of Proposed Rulemaking scheduled for a Commission vote at its May 18, 2017 open meeting.

Western UnionLast week, California became the 50th state to join the multistate settlement with Western Union over its alleged complicity in fraud-induced wire transfers.  This followed Western Union’s $5 million agreement with 49 state and the District of Columbia for costs and fees in January, not to mention a whopping $586 million in settlement agreements with the United States DOJ and FTC.  While DOJ brought wire fraud and anti-money laundering charges against Western Union, and the FTC alleged violations of Section 5 of the FTC Act, and the Telemarketing Sales Rule, the states raised violations of their respective consumer protection laws.  California brought its complaint pursuant to the Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200-17209 (“UCL”), its analog to the FTC Act.

Some quick background on the UCL:

  • Traditionally, the UCL is thought to prohibit unfair competition, which includes unfair, deceptive, misleading, or false advertising.  § 17200; see Lavie v. Procter & Gamble Co., 105 Cal. App. 4th 496, 512 (2003) (whether “the ordinary consumer acting reasonably under the circumstances” is likely to be deceived).
  • But the UCL also forbids business activity unconnected with advertising when such activity constitutes an “unlawful” or “unfair” business practice that either violates another law or violates an established public policy.  § 17200; see e.g., In re Anthem Data Breach Litig., 162 F. Supp. 3d 953, 990 (N.D. Cal. 2016); Ballard v. Equifax Check Servs., Inc., 158 F. Supp. 2d 1163, 1176 (E.D. Cal. 2001).  Some common defenses to these claims include compliance with the underlying law, the practice is not unfair or is justified, and federal preemption.
  • The UCL provides private plaintiffs with the ability to bring claims for restitution and injunctive relief, while the government can also impose civil penalties of up to $2,500 per violation.  §§ 17203, 17206; see e.g., People v. JTH Tax, Inc., 212 Cal. App. 4th 1219, 1254 (2013) (“[T]he court could have imposed penalties of over $9 million, but only imposed penalties of $715,344 for these advertisements.”).

Here, the California Attorney General alleged that Western Union, during the course of its money transferring services, failed to scrutinize and stop complicit agents that did not comply with anti-money laundering policies, inadequately trained, vetted and reported agents, and overall did not “prevent fraudulent telemarketers, sellers, and con artists from using Western Union’s money transfer system to perpetrate their frauds.”  In other words, Western Union exposed its customers to fraud in violation of the UCL.

As part of the global settlement, Western Union agreed to implement a comprehensive anti-fraud program to detect and prevent future incidents.  California consumers who made a wire transfer through Western Union are entitled to a share of the DOJ restitution fund and may be eligible for more than $65 million in refunds.  The California Department of Justice also may recoup costs and fees from the $5 million multistate fund.

Bottom line: the UCL is a dynamic enforcement mechanism with the potential to curtail many different types of business activities that seemingly harm consumers, and provides the Attorney General with the ability to inflict stiff penalties for violations.