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John E. Villafranco

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Earlier this week, the Direct Selling Self-Regulatory Council (DS-SRC) opened its doors for business. Its objective is to provide independent, impartial, and comprehensive monitoring of direct selling companies on an industry-wide basis, address income misrepresentations (including unsubstantiated lifestyle claims) and false product claims by companies and salesforce members, and enhance the reputation of direct selling.

The DS-SRC will be administered by the Advertising Self-Regulatory Council (ASRC), which operates under the Council of Better Business Bureaus.   This should help the new self-regulatory body achieve its goals, considering the great success of ASRC and the programs it currently administers, including the National Advertising Division (NAD), Children’s Advertising Review Unit (CARU), National Advertising Review Board (NARB), Electronic Retailing Self-Regulation Program (ERSP) and Online Interest-Based Advertising Accountability Program (Accountability Program.).

Peter Marinello, Vice President of CBBB, will serve as Executive Director of the DS-SRC, and will oversee the program and its staff.  Additional staffing will include a senior legal analyst, and a staff attorney. DS-SRC may utilize monitoring services at its discretion, and in consultation with the Direct Selling Association (DSA).

DS-SRC’s will have jurisdiction over the following:

  • Independent monitoring of the direct selling marketplace;
  • Matters referred by the DSA Code Administrator based on a pattern and practice of complaints identified, or pursuant to media reports, or matters identified by consumers;
  • Matters raised by competitor challenges;
  • Inquiries received from distributors, customers and other users of direct selling companies products or services; and
  • Complaints from Better Business Bureaus directed to DS-SRC.

DS-SRC’s legal standards will be rooted in case decisions, FTC guidance, self-regulatory decisions of the National Advertising Division and the Electronic Retailing Self-Regulation Program, the DSA Code of Ethics, and the BBB Code of Advertising.

DS-SRC’s independent monitoring will allow for the review of relevant promotional content created by direct selling companies and their salesforces, including websites and social media.  Any problematic content will be identified, and companies will be provided an opportunity to address the issues.

When a matter is referred by the DSA Code Administrator, pursuant to media reports, or inquiries, DS-SRC will identify content of concern, and the company will be given an opportunity to address these concerns within 15 business days.  In the event that substantiation is not sufficient, DS-SRC may request additional information or recommend corrective measures or remedial instruction to the salesforce.  It will also issue a case report with a summary of issues.

With respect to competitor challenges, DS-SRC will allow companies to challenge the income representations and/or product claims of competitor companies, with a submission addressing the content with a reasonable level of specificity.  A company will also be given the opportunity to address content, and the DS-SRC will issue a decision which will then be reported publicly (so long as it has not been appealed).    DS-SRC reserves the right to not hear a case if the complaint is overly broad, if a party publicizes the case while pending, if the matter is the subject of litigation, or if the content has been withdrawn.

Companies that do not agree to implement corrective measures, ignore the inquiry, or do not participate, may be referred to the appropriate government agency, most likely the Federal Trade Commission.

DS-SRC will issue case decisions within 30 days of the last document received, prepare a case decision, and invite the company to provide a responsive statement.  Should the DS-SRC find that the content at issue is not adequately substantiated, the company will have to submit a response indicating whether it (1) agrees to comply with DS-SRC’s recommendations; (2) will not comply with DS-SRC’s recommendations; or (3) will appeal all or part of DS-SRC’s decision.

Once a case decision has been made, they will be published in Case Reports.  The decision will include a summary of the content at issue, a summary of each party’s position, and the ultimate resolution (including whether a party complied or was unresponsive).

The formation of the DS-SRC responds directly to statements made by FTC commissioners, bureau directors, and senior staff over the years, and should be viewed as a very positive step for an industry that is frequently the subject of regulatory attention.  Expect greater self-regulatory focus on income misrepresentations and lavish lifestyle claims in the months ahead, with the objective of promoting truthful and accurate advertising among direct selling companies and, in turn, raising the credibility of the industry.

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.

Last week, Gonzalo wrote about the letter Truth in Advertising sent to the FTC, urging the Commission to investigate Diageo’s use of influencers to market Ciroc vodka on Instagram. We also learned last week that the Humane Society sent a similar letter to the FTC requesting that Commission initiate an investigation of Pilgrim’s Pride for its treatment of chickens.  These complaints got us thinking – how often are third parties successful in instigating regulatory activity?

Of course, without knowing the facts, it is impossible to know whether the complaint allegations have merit.  We do know, however, that many similar complaints have been filed asking the FTC to look into a company’s practices.  For example, with regard to the subject of animal welfare, we have seen complaints that include allegations of deceptive advertising relating to puppy sellers and pork producers. Similar claims have also been filed by PETA (example here) and Mercy for Animals (example here). These complaints have not usually led to litigation or negotiated consent orders.

That is not to say that these complaints do not result in some action. For example, last year, after four consumer groups urged the FTC to investigate and bring enforcement actions regarding the use of influencers on Instagram, the FTC sent more than 90 letters to companies and influencers, reminding the recipients of their legal obligations. And in 2016, after HSUS urged the FTC to take action against companies claiming “faux fur” (example here), the FTC released a blog post warning consumers about the risks (details here).

Even without FTC action, complaints themselves may have an effect on the company involved. As another example, in 2013, Tyson Foods announced a commitment to the humane treatment of animals and formed an independent advisory panel to help them pursue this mission after the Humane Society and the Animal Legal Defense Fund both filed FTC complaints against them. Full story here.

Also, in the area of dietary supplement advertising, the FTC has maintained a strong interest in the crackdown against false advertising of health claims, and they have taken action when urged to do so by third parties.  CSPI filed a complaint asking for the FTC and FDA to file claims against dietary supplements holding themselves out as opioid withdrawal aids and were successful in getting the action pursued (here).

So, while third party complaints don’t always (or even usually) lead to formal enforcement action, they do often result in action.

Last Friday, our friend August Horvath of Foley Hoag presented at an Advertising Self-Regulatory Council (ASRC) conference on consumer perception surveys.  Among the many interesting observations made by August were the following:

  • Over a 5+ year period, June 2013 to present, only 36 cases or 8 percent of total NAD cases, included reference to a consumer perception survey.   I would have expected it to be slightly higher.
  • 42 surveys were submitted in support of the challenger and 10 were submitted by the advertiser.  This distribution makes sense, given that the challenger has the time to design and field a survey prior to filing, whereas the advertiser must submit its response in accordance with the briefing schedule.
  • In 28 percent of cases decided, the NAD mentioned “the absence of consumer perception evidence,”  suggesting that NAD would be receptive to more extrinsic evidence as it considers cases involving implied claims.  Of course, this could simply be boilerplate introduction for the case reviewer’s unaided interpretation of the message being conveyed.
  • Where the NAD has rejected a survey, the most-cited reasons have been leading closed-ended questions, issues with the control question or improper control stimulus, and questionable coding of open-ended questions.
  • In assessing surveys, NAD frequently states that (1) the control stimulus should closely resemble the test stimulus, (2) test results from one ad will not be applicable to another ad, even if claims are substantially similar, (3) when testing an ad, it should be presented in the same context as it is viewed in the marketplace. 
  • Surveys that focus on the issue of materiality or whether a claim is puffery are of little use at NAD.   The former is of no surprise, given that materiality does not enter in to an assessment of whether a claim is truthful or accurate, but the finding on puffery was unexpected.  I would have thought there would be more instances where a party attempted to support its assertion that a claim was subjective and incapable of measurement (puffery) with extrinsic evidence.

In addition to August’s presentation, we heard from survey experts Daniel Ennis, Hal Poret, and Joel Steckel, as well as NAD attorrneys Annie Ugurlayan, Hal Hodes, Martin Zwerling, and Kat Dunnigan, who touched on generally accepted survey structure and principles, common flaws, and recent NAD cases involving consumer perception.

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 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

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.

The FTC released today Business Guidance Concerning Multi-Level Marketing, which offers answers to frequently asked questions to assist multi-level marketers in evaluating their business practices for compliance with the FTC Act.  The Guidance begins by restating the general standard for pyramid schemes set forth in the FTC’s 1975 Koscot decision and then goes on to address more contentious issues, such as internal consumption, retail sales validation, the importance of refund and buyback policies, and income and business opportunity claims.

The Guidance memorializes and expands on several principles embodied in recent FTC settlements with multi-level marketing companies and makes clear that FTC Staff will look to these principles in assessing whether a company has committed unfair and deceptive acts or practices in violation of the FTC Act.  Key points include the following:

  • Internal consumption (i.e., purchases from participants in the business opportunity) may in some cases be permissibly counted as genuine retail sales, but this will be a fact-specific inquiry.  The Guidance cites the Herbalife settlement as an example of a marketing plan that appropriately permits payment of compensation based on internal consumption, but “subject to specific limitations and verification requirements.”  While emphasizing that the validity of internal consumption will depend on a “comprehensive analysis of a variety of factors,” the Guidance highlights two of the foremost factors FTC Staff will consider: (1) whether the compensation plan incentivizes participants to purchase unrelated to demand (e.g., to qualify for bonuses, advance in the marketing plan or obtain a greater discount); and (2) fact-specific information about a purchase bearing on whether it seems demand-driven (e.g., whether the purchases are within typical consumption habits).
  • Multi-level marketers are not expressly required to retain and validate receipts, but should ensure sufficient documentation to ensure that actual sales are made to real customers.  Again, the Commission here emphasizes that there is no single correct way to validate retail sales, and that one approach – or a combination of approaches – may work for one company and not work for another.  The Guidance does, however, explain that staff will be most interested in “direct methods” used to verify that retail sales are made to real customers, and that “indirect methods – such as policies requiring participants to attest they have sold a certain amount of product to qualify to receive reward payments – are less likely to be persuasive, with unsupported assertions being even less persuasive.”
  • Buyback provisions are helpful but not dispositive in preventing inventory loading and unlawful conduct.  The Guidance affirms that allowing participants to return unsold products can help reduce potential consumer harm by decreasing the risk of losing money for those participants who take advantage of the buyback policy.  However, the Guidance cautions that “money-back guarantees and refunds are not defenses for violations of the FTC Act” and that unfair and deceptive acts may still occur notwithstanding the existence of those policies.  The section appears intended to address pending congressional legislation, H.R. 3409, which would include a controversial carve-out for multi-level marketing companies with inventory repurchase programs.
  • Claims that convey lifestyles or earnings that are only attained by a small subset of participants are likely to be misleading.  The Guidance explains that all business opportunity and earnings claims must be supported by a reasonable basis, and that claims that present atypical earnings as typical will likely be misleading.  For example, the Guidance explains that images of expensive houses, luxury automobiles and exotic vacations attained through the multi-level marketing program are likely to be deceptive if those results are not generally achieved by others and properly qualified.  Similarly, representations about full-time income and the capacity to “fire your boss” or “become stay-at home parents” are likely to present compliance issues.  Even hypothetical scenarios (e.g., you can make $1,000 if you recruit 30 people and sell X products) may pose compliance risks if those hypotheticals make assumptions that are untrue for the typical participant.
  • Developing and implementing a compliance program is important.  Finally, the Guidance makes clear that it’s not enough to nominally adopt these policies or even ensure that the company itself complies with the policies.  Rather, MLMs should develop and maintain a successful compliance program that includes monitoring of participants to ensure they are also complying with applicable policies and procedures, particularly those related to claims, sales validation, and other consumer protection-oriented policies.

While the principles set forth in the Guidance will not come as a surprise to most MLMs, they serve as an important reminder that MLM compliance inquiries are multi-faceted and full of gray areas.  Companies would be well-served to evaluate their business practices and compliance programs in light of the Commission’s new guidance and prior related settlements.

After months of speculation among the consumer protection and antitrust bars, Trump announced today his intention to nominate former Director of the Bureau of Competition and current Paul Weiss partner Joseph Simons as Chairman of the Federal Trade Commission.  Trump also announced his plan to nominate Rohit Chopra, currently a senior fellow at the Consumer Federation of America and previously Assistant Director at the Consumer Financial Protection Bureau (CFPB), to one of two vacant commissioner seats.  News outlets also are reporting that Trump will soon nominate Noah Phillips, chief counsel for Senator John Cornyn (R.-Tex.), to an additional commissioner seat.

Assuming Simons is confirmed and appointed as Chair, Acting Chairman Maureen Ohlhausen would return to her position as Commissioner.  Her term is set to expire in September 2018.  Commissioner Terrell McSweeny also continues to serve on the Commission, although her term expired in September, and as reported by MLex.com, Simons’ confirmation would place him in the slot she currently occupies.  More information on each of the three nominations follows.

Joseph Simons.  Currently a partner and co-chair of the Antitrust Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP, Simons has worked in private practice for the majority of his career and is likely to be welcomed by industry as a reasoned and qualified choice.  He also has experience in public service, having served at the FTC as Director of the Bureau of Competition from June 2001 to August 2003.  He also served as the Associate Director for Mergers and the Assistant Director for Evaluation at the FTC in the late 1980s.  Simons has worked on a number of high profile antitrust cases, including representing MasterCard Inc. in antitrust class actions over merchant fees, and representing a consortium including Microsoft, Ericsson, RIM and Sony in its $4.5 billion acquisition of the patent portfolio of Nortel Networks.

As a long-time antitrust practitioner with experience in private and public practice, Simons is likely to bring a thorough and deliberative approach to the Commission.  While Simons is unlikely to support enforcement that is not justified by a rigorous economic analysis of costs and benefits, he’s also unlikely to shy away from challenging deals and conduct that fail the economic test.  In short, economic effects and rule of reason will guide policy.  Simons notably has significant high tech and intellectual property experience, as well as merger experience, where economics predominates decision making.

On the consumer protection side, Simons’ experience will likely reinforce the policies announced by Acting Chairman Ohlhausen to put economic injury at the center of case selection.  The emphasis on fraud will likely continue, while actions and remedies that would regulate ordinary business practices will face the test of economic analysis.  If he’s confirmed as expected, Simons would serve a seven-year term that began on September 26, 2017.

Rohit Chopra.  While Simons’ experience comes primarily from the competition side, Chopra has concentrated on consumer protection issues.  Chopra is currently a senior fellow at the Consumer Federation of America where he focuses on consumer finance issues, particularly with regard to their impact on younger Americans.  Chopra was previously the Assistant Director of the CFPB where he led enforcement actions against student loan borrowers and helped establish a new student loan complaint system at the agency.  Chopra’s background and experience with consumer finance give him an expertise rare among commissioners and could translate into significant influence on hot topics such as credit reporting, debt collection, and big data.  He also may engage in advertising and privacy initiatives affecting children and younger Americans, given his prior interest in this area.

Chopra’s approach to competition could be influenced by longtime ally, Senator Elizabeth Warren (D.-Mass.), who has distinguished herself as a proponent of aggressive enforcement and new legislation.  Unlike most prior FTC commissioners, Chopra is not an attorney.  His background is in business and includes an MBA from the Wharton School at the University of Pennsylvania.  Trump indicated that Chopra would be appointed to the remainder of a seven-year term that would expire on September 25, 2019.

Noah Phillips.  While yet to be announced by the Trump Administration, media outlets are reporting that Phillips will be named to fill another vacancy at the Commission.  Phillips is presently Chief Counsel to Senator Cornyn.  Phillips previously worked as an associate at Cravath, Swaine & Moore LLP and Steptoe & Johnson LLP, before leaving the private sector to serve as counsel to Cornyn.

Phillips would come to the Commission with significant law firm experience, as well as an understanding of the Hill.   Among others, Cornyn serves on the Senate Committee on Finance, which includes subcommittees on international trade and energy.  We would expect, therefore, to see Phillips take an active interest in international issues, as well as competition in the energy sector.

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We will continue to monitor the appointment and confirmation process and post updates here.

On Thursday, a federal court in New York dismissed an FTC and New York Attorney General action against Quincy Bioscience, which sells the dietary supplement, Prevagen.  Quincy bases claims for its product on research that includes a randomized, controlled clinical study.  The court observed that the parties agreed that this “gold standard” study followed “normal well-accepted procedures” and showed statistically significant results in a subgroup of healthy, aging adults, although not the experimental group overall. 

The court acknowledged the regulators’ arguments that data analyses revealing the subgroup results were subject to an increased risk of false positives.  The court, however, concluded that the regulators failed to allege that “any actual errors occurred” or that “that reliance on the subgroup data ‘is likely to mislead consumers acting reasonably under the circumstances.’”  The court observed that “the subgroup concept” is “widely used in the interpretation of data in the dietary supplement field.” 

Kelley Drye represented Quincy Bioscience in the matter.