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Donnelly L. McDowell

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The Federal Trade Commission has long supported advertising industry self-regulation as a means of promoting truthfulness and accuracy in advertising. One of the key aspects of this success has been threat of referral to the FTC: Advertisers that refuse to participate in the self-regulatory process or refuse to comply with recommendations after participating are referred to the appropriate government entity, usually the FTC’s Division of Advertising Practices, which will review the claims at issue. Over the years, the specter of a National Advertising Division referral to the FTC has prompted most advertisers to participate in the self-regulatory process and comply with the final decision.

Law360 published the article “NAD Referrals To FTC: How Big Is That Stick?,” co-authored by partner John Villafranco and senior associate Donnelly McDowell.  The article provides an analysis of recent NAD cases that suggests referrals to the FTC are on the rise over the past two years and discusses advertiser commitment to the self-regulatory process. Are advertisers turning their back on self-regulation and rolling the dice at the FTC? And are they doing so based on an assessment of the risk that a referral could result in a major FTC investigation or enforcement action?

To read the article, please click here.

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While many today returned to work after the Holiday season, things remained quieter than usual here in the nation’s capital – with many federal workers furloughed until further notice as the federal government continues to be in a partial shutdown.  President Trump is reportedly meeting with congressional leaders today ahead of Thursday’s start to a new congressional session but, at least for now, there’s no immediate end to the shutdown in sight.

Here’s how the shutdown is affecting federal agencies responsible for overseeing and enforcing advertising and privacy laws:

  • The FTC closed as of midnight December 28, 2018.  All events are postponed and website information and social media will not be updated until further notice.  While some FTC online services are available, others are not.  More information here.
  • The CPSC is also closed, although a December 18, 2018 CPSC memorandum summarizing shutdown procedures indicates that certain employees “necessary to protect against imminent threats to human safety” will be excepted employees and continue work during the shutdown.  The CPSC consumer hotline also continues to operate. Companies should remember that obligations to report potential safety hazards are not furloughed, so the mantra of “when in doubt, report” still applies, even if public announcement of a recall may be delayed.
  • Roughly 40% of FDA is furloughed according to numbers released by its parent agency, the Department of Health and Human Services.  In a post on its website, the agency explained that it will be continuing vital activities, to the extent permitted by law, including monitoring for and responding to public health issues related to the food and medical product supply.  The agency is also continuing work on activities funded by carryover user fee balances, although it is unable to accept any regulatory submissions for FY 2019 that require a fee payment.
  • Because the CFPB is funded through the Federal Reserve and not Congress, it remains in operation.

Earlier this year, the Federal Trade Commission released new business guidance for direct sellers and multilevel marketers describing the legal principles that it will apply when evaluating practices under the FTC Act. Law360 published the article “What The FTC Said About Direct Selling In 2018,” co-authored by partner John Villafranco and senior associate Donnelly McDowell.  The article discusses the FTC guidance along with recent enforcement actions and staff comments, and poses seven questions direct sellers and multilevel marketers should consider as we close out 2018 and look toward the future. To read the article, please click here.

The Senate today confirmed Kathleen Kraninger as CFPB Director by a party-line, 50-49 vote, with Sen. Tillis abstaining.  Kraninger will replace current Acting Director Mick Mulvaney, who also currently oversees Kraninger at the Office of Management Budget (OMB) where she is associate director of general government and Mulvaney is Director. Kraninger is expected to continue deregulatory initiatives launched during Mulvaney’s tenure as Acting Director at the CFPB. 

Kraninger is set to serve a five-year term pursuant to the Dodd-Frank Act.  However, current litigation challenging the constitutionality of the CFPB’s structure raises questions as to whether Kraninger will ultimately serve the full five-year term, particularly if a Democratic president is elected in 2020.  As we previously discussed here, the D.C. Circuit initially ruled that the CFPB was unconstitutionally structured because its single director can only be removed for “inefficiency, neglect of duty, or malfeasance in office,” but subsequently reversed the holding in an en banc decision.  The constitutionality of the CFPB’s structure is also being challenged in the Second and Fifth Circuits – increasing the likelihood that the Supreme Court will take up the issue at some point soon.

 

A federal jury in Illinois recently awarded Dyson, Inc. over $16 million in damages after finding that SharkNinja falsely advertised that its Rotator Powered Lift-Away vacuum was better than Dyson’s best-performing vacuum, the DC65.  SharkNinja ran ads that claimed that independent testing showed that the Rotator Powered Lift Away vacuum was proven to have “more suction” and “deep-cleans carpets better than Dyson’s best vacuum.”

The commercial also featured a graph that purported to measure each machine’s cleanability, but Dyson alleged that the results were not actually from referenced independent tests but rather internal tests.  Dyson further alleged that the tests failed to comply with industry standards for vacuum cleaning testing in the first instance and that SharkNinja effectively rigged the third-party tests by directing the testing company on how to test the machines.  The jury found that SharkNinja’s advertising of results from unsound tests was an intentional act to mislead consumers and awarded significant damages accordingly.

The case underscores the importance of conducting objective and reliable testing and carefully tailoring ad claims to accurately convey the results of tests.  The decision also is striking in terms of the size of the award, particularly as the jury found it appropriate to disgorge nearly all of the $18 million in profits that SharkNinja made from its vacuum during the time the commercial aired.

Summer associate Vishwani Singh contributed to this post. Ms. Singh is not a practicing attorney and is practicing under the supervision of principals of the firm who are members of the D.C. Bar.

The FTC announced yesterday that it will accept comments and hold a series of public hearings on consumer protection, privacy, and competition policy and enforcement.  The hearings will take place during fall and winter of this year and will evaluate whether recent changes in the economy, technology, or international landscape require adjustments to how the Commission approaches consumer protection, privacy, and competition issues.

The hearings are modeled off of hearings held in 1995 under then-Chair Robert Pitofsky.  Those hearings took place amidst the early growth of the internet and e-commerce, featuring panels such as, “The Newest Medium for Marketing: Cyberspace,” “Privacy in Cyberspace,” and “The Changing Role of the Telephone in Marketing.”  The 1995 hearings featured panelists from large companies including Walt Disney, General Electric, and Coca-Cola, along with consumer group representatives, regulators, academics, and attorneys from private law firms.  The hearings culminated in a two volume report on the state of consumer protection and competition policy.

In announcing the 2018 hearings, FTC Chair Joe Simons noted that “the FTC has always been committed to self-examination and critical thinking, to ensure that our enforcement and policy efforts keep pace with changes in the economy.”  Simons served as Director of the Bureau of Competition immediately after Pitofsky’s tenure as Chair under then-Chair Tim Muris – and alluded to Pitofsky, Muris and former Chair Kovacic in his statement announcing the hearings.  Simons’ statement also expressed his view that “[t]his project reflects the spirit, style, and, most importantly, broad scope of that effort,” and characterized the efforts as an “all-agency” project that will entail significant efforts from the Bureaus of Consumer Protection, Competition, and Economics, the Office of the General Counsel, the Office of International Affairs, as well as the Office of Policy Planning. Continue Reading FTC Examining How Consumer Protection and Privacy May Be Affecting Innovation and Competition; Seeking Input and Will Hold Policy Hearings to Address

Florida attorney general Pam Bondi filed a complaint last week against Icebox Cafe, L.C. alleging that the restaurant violated Florida’s Deceptive and Unfair Trade Practices Act by making misleading claims that its food products were “locally-sourced” and “sustainable.”  The defendant operates a self-proclaimed “farm-to-table” restaurant in Miami Beach, along with select locations at airports.

According to the complaint, Icebox sought to capitalize on the market for locally sourced and sustainable food products by making false and misleading claims.  For example, the Icebox Miami airport location claimed that its menu items were “farm-to-terminal” and “local,” but the company’s invoices indicate that almost none of the products were sourced from local farms and distributors, according to the action.  The complaint also alleges that defendant’s menus contained representations that its products were from specific local farms and distributors, but its invoices again belied this assertion.

The complaint additionally identifies allegedly misleading claims about “wild” salmon and other fish that had been purportedly caught the same day it was sold to consumers.  While the complaint doesn’t address the substantiation that the advertiser would have needed to support these claims, general advertising law principles require advertisers to have a reasonable basis to support such claims.  The Florida AG points to Icebox’s invoices as evidence that the defendant lacked such a basis and could not support the claims.

The action is an important reminder that advertisers must consider how consumers are likely to interpret “locally sourced” and “sustainable” claims and ensure that they have substantiation to support those takeaways before making the claims.  Unlike many claims for food products that are expressly defined by federal and/or state law, claims about local sourcing and sustainability are not generally defined.  The action here, therefore, reinforces the need to consider substantiation both for claims subject to explicit standards and claims related to undefined terms that may be subject to varying interpretations by different consumers.

In this case, the complaint suggests that the defendant’s invoices demonstrate that the claims were outright false, but one could imagine an instance where some consumers might consider the food sufficiently “local” and others might view the claim as deceptive.  For example, is fish sold in Miami but harvested in north Florida “local”?  What makes a product “sustainable”?  Consumer perception evidence could be useful in these closer calls.  It will be interesting to see whether the terms of any settlement effectively set a new standard for these terms in Florida.  Until then, the lesson for advertisers everywhere is to be precise when using such undefined but attractive language.

 

The FTC today filed a complaint against Lending Club alleging that it deceived consumers by advertising loans with “no hidden fees” and subsequently concealing substantial loan origination fees.  The complaint points to consumer complaints and internal compliance documents as evidence that Lending Club knew that consumers were being misled and continued to misrepresent the loans anyway.

The complaint charges four distinct violations:

  • Deception regarding up-front fees.  While advertising loans with “no hidden fees,” the Commission alleged that Lending Club actually charged substantial loan origination fees (on average, about 5% of the loan amount) and failed to clearly and conspicuously disclose those fees – both in advertising and throughout the application and approval process.  The complaint provides screenshots of the consumer experience from advertisement to sign-up to approval.  In both the desktop and mobile environment, the FTC charged that consumers were deceived because they would need to do either of the following to learn about the fee: (1) hover over a hyperlink explaining advertised APR to learn that the represented rate includes the loan origination fee; or (2) scroll to the bottom of the loan approval page and notice the fee disclosure embedded in the middle of a text heavy page.  The FTC cited frequent consumer complaints and internal compliance documents referencing potential deception to argue that Lending Club knew it was deceiving consumers and decided to continue its practices anyway.
  • Deception regarding loan approval.  The complaint also alleges that Lending Club made deceptive representations that loans were “on the way” or were “100% backed,” notwithstanding that it knew that a more significant approval step had yet to be completed and many consumers would not ultimately obtain the allegedly approved loans.  According to the complaint, Lending Club uses a two-step “front-end” and “back-end” approval process and misleadingly suggested that consumers were approved after just the first step, despite knowing many consumers would be rejected after the “back-end” step.
  • Unfair billing practices.  The complaint also alleges that Lending Club engaged in unfair acts by withdrawing money from consumers’ bank accounts without authorization, or in amounts in excess from consumers’ authorizations.  Many of these unauthorized charges occurred after consumers had already paid off their loans with Lending Club, according to the complaint.
  • Gramm-Leach-Bliley Act (GLBA) violations.  Lastly, the complaint alleges that Lending Club violated GLBA by failing to deliver initial privacy notices to consumers as required under GLBA and FTC and CFPB implementing regulations.  The complaint explains that Lending Club was subject to GLBA because it is a financial institution under the Act in that it services loans, notwithstanding that the loans are actually made by a third-party bank.  The GLBA allegations are a good reminder that the definition of “financial institution” under GLBA is a tricky one that is distinct from similar definitions under other statutes.

The complaint was filed without a consent judgment in federal court in the Northern District of California, and was approved by both remaining Commissioners, Chair Ohlhausen and Commissioner McSweeny.  McSweeny recently announced that she will leave the Commission at the end of this week on April 27.  Five new Commissioners nominated by President Trump are presently awaiting a full Senate confirmation vote.

The Senate Commerce, Science, and Transportation Committee held confirmation hearings yesterday for the four nominees to the Federal Trade Commission: Joseph Simons (nominated as Chair), Rohit Chopra, Noah Phillips, and Christine Wilson.  We previously discussed the nominations of Simons, Chopra, and Phillips here.   Wilson, currently a Senior Vice President at Delta Airlines and previously Chief of Staff to former FTC Chair Timothy J. Muris, was subsequently nominated to the fourth Commissioner seat.

The hearing touched on a range of consumer protection and antitrust issues from big data and interconnected devices to prescription drug pricing and the application of antitrust laws to big technology companies like Google and Facebook.  As anticipated, the nominees generally affirmed their commitment to vigorously enforce consumer protection and antitrust laws but refrained from committing to particular policy positions or advocating specific legal interpretations on hot button issues.

One notable exchange occurred when Senator Cruz spoke about his time at the FTC under former Chair Muris in the early 2000s, when both Simons and Wilson also worked at the Commission as Director of the Bureau of Competition and Chief of Staff to Chair Muris, respectively.  Cruz, Simons, and Wilson each spoke glowingly of Muris and his legacy at the Commission.  Simons noted that the biggest lesson he learned from Muris was the importance of clearly articulating priorities to agency staff, calling it “an absolutely critical thing in terms of leading the FTC” and emphasizing that that he intended to do the same upon confirmation.  Wilson praised Muris for enlisting other commissioners to help advance his agenda and noted that the multi-member composition of the Commission allows it to leverage the unique experiences and expertise of each commissioner.

While the multiple references to Muris’s tenure were framed primarily in terms of leadership philosophies, they may also signal a return to certain policy and enforcement positions taken by Muris.  For example, under Muris’s leadership, the Commission continued to apply the longstanding “reasonable basis” standard when evaluating whether an advertiser had sufficient substantiation to support a claim.  In more recent years, particularly in the area of health claims, the Commission advocated for more stringent substantiation standards that have typically only been required to approve new drugs, such as requiring two well-controlled clinical studies to support certain claims.  Muris has been an outspoken critic of this development, characterizing it as “a significant ossification of a formerly flexible standard” in a paper co-authored with Dr. Howard Beales and Robert Pitofsky.   The piece further argues that such “an arbitrary, inflexible standard would deny important information to consumers” and raise First Amendment concerns.

To be clear, the hearings didn’t touch on the approach to substantiation applied during Muris’s tenure directly, but the positive references could signal a return to a more flexible substantiation standard.  It is also encouraging for advertisers that Simons indicated his intent to make clear agency priorities and standards, presumably signaling that the Commission’s position will be well communicated to industry.

The confirmation process is expected to move quickly.  We’ll continue to monitor closely and post updates here.

Earlier today, an en banc panel of the U.S. Court of Appeals for the D.C. Circuit ruled that the CFPB was constitutionally structured, reversing an earlier decision by a divided three-judge panel and holding that the Dodd-Frank Act permissibly shields the CFPB Director from removal without cause.  The Court’s 7-3 majority opinion only addressed the constitutionality of the Director’s for-cause removal protection; it did not substantively address a related issue concerning the interpretation of the Real Estate Settlement Procedures Act (RESPA) and instead reinstated the three-judge panel’s decision as to substantive RESPA issues.

The Court found that Congress’s choice to include a for-cause removal provision did not impede the President’s Article II executive authority and duty to “take care that the laws be faithfully executed.”  Specifically, the majority held that:

  • Because the President can still remove the Director for “inefficiency, neglect of duty, or malfeasance in office,” the President retains ample tools under Article II to ensure the faithful execution of the laws.  The majority noted that this same removal standard was upheld when the Supreme Court considered the FTC’s for-cause removal provision in its 1935 Humphrey’s Executor decision.
  • The majority rejected the proposed distinction based on the FTC as a multi-member independent agency and the CFPB as a single-director independent agency as “untenable,” asserting that the “distinction finds no footing in precedent, historical practice, constitutional principle, or the logic of presidential removal power.”
  • Finally, the majority held that the functions of the CFPB and its Director, unlike, for example, the Secretary of State or another Cabinet officer, are not core executive functions, and financial and consumer protection regulators have long been afforded a degree of independence, citing the FTC, the Federal Reserve, the FDIC, and others as examples.  The majority asserted that holding otherwise would result in a “wholesale attack on independent agencies—whether collectively or individually led—that, if accepted, would broadly transform modern government.”

The procedural uniqueness of the case makes it uncertain whether it will be appealed to the Supreme Court.  Under the Trump administration, the Justice Department supported the earlier decision finding the CFPB structure unconstitutional and expressed disappointment with today’s decision.  In that PHH could benefit from the reinstatement of the three-judge panel’s decision on RESPA issues, its appetite for appeal may also be limited.  We’ll continue to watch this interesting case closely and post updates here.