Michaels Stores Inc. Agrees to Pay $1.5 Million CPSC Civil Penalty

Last week, the Department of Justice (“DOJ”) announced that Michaels Stores Inc. has agreed to pay $1.5 million in civil penalties to settle allegations that Michaels failed to file a timely report about a safety hazard associated with a large glass vase that Michaels sold. In 2015, DOJ filed a complaint on behalf of the Consumer Product Safety Commission (“CPSC”) against Michaels, an arts and crafts retailer, with charges that the company knew of multiple consumer injuries for over a year before reporting to the CPSC. Section 15(b) of the Consumer Product Safety Act requires manufacturers, importers, distributors, and retailers to report immediately, which is defined as “within 24 hours of obtaining reportable information,” if a product has the potential to create a substantial hazard due to a defect, presents an unreasonable risk of serious injury or death, or fails to adhere to a consumer product safety rule or standard. If a company is unsure whether or not a report is required, it may investigate for up to ten working days.

Michaels sold about 200,000 vases, and the CPSC and DOJ alleged that the products could shatter in consumers’ hands because they were too thin to withstand the pressure of normal handling. Injuries reportedly associated with the breaking glass included permanent nerve damage and lacerations requiring stitches. Michaels, as the complaint asserts, “possessed information that the vases had injured one consumer in 2007 and at least four customers in the first half of 2009,” but did not report to the CPSC until February 2010.

In an unusual move for DOJ and CPSC, the original complaint alleged that, once Michaels notified the CPSC, it falsely conveyed how the glass vases were acquired, so DOJ also brought a material representation count. Specifically, the report Michaels submitted to CPSC stated that the vases were purchased from a vendor, but records identified Michaels as the importer. In April 2017, dropped the material misrepresentation claim to focus on the civil penalties and injunctive relief.

In addition to paying the civil penalty, consistent with previous civil penalties, Michaels must implement a compliance program to ensure timely and accurate reporting to the CPSC in the future.

To avoid similar consequences, companies should remember the very low bar for what triggers a Section 15(b) Report to the CPSC, even for products like glass vases that have inherent properties that could cause an injury.

Senate Commerce Committee Holds Confirmation Hearings on FTC Chair and Commissioner Nominees

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.

State AGs Still Really Don’t Like Cy Pres Class Action Settlements

When class actions have a low settlement value relative to the size of the class, it is normal for defendants to pay out money to non-profit groups that advocate for issues relevant to the case rather than directly to class members. Last July, in “Give the Money to One Percenters, Not to Non-Profits,” I reported that 11 state Attorneys General had decided to buck this ongoing trend, asking the Third Circuit to reject a class action settlement in which Google would have paid $3 million to non-profit groups advocating for privacy rights.  The Third Circuit has not ruled on that appeal, but with a new brief to the U.S. Supreme Court, the number of state AGs advocating for this change now has grown to a bipartisan group of 20.

Courts approve these “cy pres” distributions to non-profits where they find it “infeasible” to distribute money directly to class members.  The Circuits are slightly split on what it means to be “feasible,” however, and in the new brief, the AGs chastise the Ninth Circuit for approving cy pres “whenever there is a large class.”  The AGs prefer “feasible” to be synonymous with “possible,” and whenever possible, they want money to be distributed, somehow, at least to a subset of affected class members.

In the new case, In re Google Referrer Header Privacy Litigation (captioned at the Supreme Court as Frank v. Gaos, with “Frank” being Ted Frank, head of the Competitive Enterprise Institute’s Center for Class Action Fairness), Google would pay out $8.5 million to settle claims that it inappropriately shared user searches with third party marketers.  The Ninth Circuit “quickly disposed of the argument that the district court erred by approving a cy pres-only settlement.”  Because “[o]bjectors do not contest the value of the settlement” or plead that they suffered any out-of-pocket injury from Google’s conduct, the only question was whether it was “feasible” to distribute $8.5 million to a class with 129 million estimated members who performed searches through Google. Continue Reading

Be Careful When Marketing Around the Olympics

As consumers get ready to watch the 2018 Winter Olympic Games, some companies are getting ready to capitalize on the public enthusiasm. Many marketers want to incorporate Olympics-related themes – ranging from overt mentions of the Olympics to more subtle sports references – in their ads in order to associate their brands with the attention that is being paid to the games.  Although this makes sense from a marketing perspective, it can also pose some legal risks.

The Ted Stevens Olympic & Amateur Sports Act gives the United States Olympic Committee (or “USOC”) exclusive rights to use certain words, like “Olympic,” and symbols, like the interlocking rings. The Act also prohibits use of any word, symbol, or combination thereof that “tending to cause confusion or mistake, to deceive, or to falsely suggest a connection with” the user of the marks and the Olympics. Other countries – including South Korea – have similar laws.

Some companies pay a lot of money for the right to use these marks, so if you use them without permission, you could get a letter (or worse) from an official sponsor or a group like the USOC. The USOC has even tried stop companies from using marks in hashtags. For example, in 2016, the USOC’s chief marketing officer wrote that companies could not use hashtags such as #Rio2016 or #TeamUSA.” According to some press reports, the USOC sent letters to various companies reiterating this position.

Feel free to cheer Team USA on from your personal social media accounts this summer. But remember that what may be called “patriotic” when done from your personal account could be called “infringement” when done from a business account.

 

Think Your Prescription Drug Advertising is Beyond NAD’s Purview? NAD Disagrees.

Those of us who spend our days at the intersection of law and advertising of health products generally accept that the prescription drug world is a universe unto itself, overseen by the FDA pursuant to the Prescription Drug Marketing Act. As prescription drug companies have increased their direct-to-consumer outreach through social media, native advertising, and health information platforms, questions have arisen as to the role that the NAD might play in regulating these advertisements.  For those who are unfamiliar, the NAD is the National Advertising Division of the Better Business Bureau.  It is an industry self-regulatory body that is charged with hearing and rendering decisions in advertising disputes, typically among competitors.  It is commonly used amongst advertisers of consumer-directed products and services.  It is not commonly used amongst prescription drug advertisers and, until recently, many likely assumed that NAD did not have jurisdiction to hear prescription drug advertising challenges.

A relatively recent NAD decision makes clear that that body believes that it has jurisdiction over prescription product advertising, however. Late last year, the NAD evaluated advertising by Synergy Pharmaceuticals for its Trulance product, which is prescribed for chronic idiopathic constipation.  Allergan, maker of a competing product, challenged the advertising on the basis that it included false implied superiority claims, expressly false superiority claims, and undisclosed native advertising in the form of a waiting room pamphlet that allegedly was positioned as independent and impartial patient education material.  Continue Reading

Battling Bots on Social Media

In the world of social media, a person’s power is often measured in terms of followers. More followers means the ability to influence more people. Companies who work with influencers understand this and often base compensation on this metric. For example, according to data collected by Captiv8, an influencer with a thousand followers might earn an average of $2,000 for a promotional tweet, while an influencer with a million followers might earn ten times that.

A new article in the New York Times suggests that companies may want to think twice about blindly focusing on follower counts. The authors report that a company named Devumi has sold Twitter followers to over 200,000 customers, including celebrities and other influencers. According to the article, Devumi has a stock of about 3.5 million accounts, at least 55,000 of the which use the names, profile pictures, hometowns, and other personal details of real Twitter users.

Robot Hands

The use of real people’s information to power these bots caught the attention of the New York Attorney General. In a tweet last week, Eric Schneiderman wrote: “Impersonation and deception are illegal under New York law. We’re opening an investigation into Devumi and its apparent sale of bots using stolen identities.” The investigation is the latest in a series of federal and state inquiries into the commercial and political abuse of fake accounts on social media.

How can you protect yourself from social media bots? Beyond the obvious advice that you should not buy fake followers, we recommend that companies and influencers both exercise some due diligence when it comes to followers. For example:

  • If your company pays influencers based on the number of followers they have, investigate whether those followers are real people. It may not always be possible to know for sure, but the New York Times article suggests some signs that could indicate fraud.
  • If you’re an influencer, and you’ve hired a PR company or agent to help boost your image, take steps to ensure that they aren’t doing that fraudulently. (Some of the examples in the article involved purchases that were made by third parties.)

We’ll keep an eye on this issue, as it develops. In the meantime, if you want to learn more about the dangers of risks posed by bots, read our previous post on the subject.

Full Panel of D.C. Circuit Upholds CFPB Structure, Reversing Earlier Decision

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.

The Ninth Circuit’s Hyundai Decision Is Regrettable But Forgettable

This week, by a 2-1 vote, a Ninth Circuit panel reversed a district court’s approval of a massive class action settlement involving Hyundai’s and Kia’s allegedly inflated statements of fuel efficiency.  The majority’s long decision, over a vigorous dissent, amounted only to a “greatest hits” collection of Ninth Circuit class action and settlement skepticism.  Nothing in it was new, and importantly, the panel majority Court said explicitly that the district court could approve the settlement anew upon remand.   

Put another way:  Settlement proponents in Ninth Circuit cases are going to have to deal with this decision in In re: Hyundai and Kia Fuel Econ. Litig. for the foreseeable future, but the case really did not erect any hurdles to approval that weren’t already there.

Twenty years ago, when the asbestos bar proposed a multibillion-dollar, highly creative settlement of tens of thousands of asbestos cases, the Supreme Court bounced the settlement because the proposed class raised too many individual issues.  The Supreme Court’s holding in that case—Amchem Prods. Inc. v. Windsor—was that although federal judges need not consider the manageability of a class action trial when a settlement is proposed, a settlement class still has to satisfy Rule 23(b)(3)’s requirement that common questions “predominate” over questions that are purely individual to each class member.  That a settlement would resolve a matter on fair terms is not enough if the settlement glosses over too many individualized issues.  Continue Reading

FDA & FTC Issue Joint Warning Letters to Companies Marketing Products to Overcome Opioid Addiction and Withdrawal

The FDA & FTC today posted warning letters to 11 marketers and distributors of opioid cessation products, alleging that such products were unapproved new drugs that violated the Federal Food, Drug and Cosmetic Act (FDCA) and that made unsubstantiated, deceptive claims in violation of the FTC Act.  In addition to the 11 joint warning letters issued to named marketers and distributors, the FTC issued four additional warning letters to unidentified marketers of similar products.  It is not clear why these four marketers were not identified by name or targeted by FDA, although it is possible that they used less egregious claims than those targeted in the 11 joint warning letters.

As to issues under the FDCA, the warning letters allege that the identified products are unapproved new drugs because they are intended to diagnose, cure, mitigate, treat, or prevent disease.  The warning letters identify representative claims that render the products “drugs” under the FDCA, including:

  • “For temporary relief of cravings, irritability, and inability to concentrate related to the use and over-use of. . .  alcohol and narcotics”;
  • “Support withdrawal relief, effective detox, and lasting recovery from addiction”; and
  • “Opiate withdrawal aid supplement.”

Because the products are not generally recognized as safe and effective for these marketed “drug” uses, the products constitute unapproved new drugs that violate the FDCA, according to the warning letters.  The warning letters further provide that the products are marketed for treatments that are not amenable to self-diagnosis or treatment without the supervision of a licensed practitioner, and thus would be prescription drugs even if they were recognized as a safe and effective treatment for opiate withdrawal.

Two warning letters targeted products labeled as “homeopathic” under FDA enforcement policies set forth in FDA’s Compliance Policy Guide (CPG), “Conditions Under Which Homeopathic Drugs May be Marketed.”  While that policy suggests that FDA will exercise enforcement discretion as to certain drug products labeled as “homeopathic” and marketed without FDA approval, the letters state that the CPG acknowledges that special circumstances may apply that supersede that policy.  According to the warning letters, the nationwide public health emergency relating to opioid addiction is one such circumstance and thus the enforcement policy does not apply to drugs marketed for opiate addiction.  In December 2017, FDA released a draft guidance that proposed a new risk-based enforcement approach to homeopathic drug products marketed without FDA approval that would prioritize regulation and enforcement for products that pose the greatest risk to patients.

As to the FTC Act violations, the warning letters note that health-related claims must be supported by competent and reliable scientific evidence at the time the claims are made.  The warning letters point to previous FTC enforcement actions challenging unsupported claims for the treatment of opiate addiction and withdrawal symptoms as evidence that such claims are likely unsubstantiated under the FTC Act.

The warning letters request unique responses to both FTC and FDA within 15 working days and direct the marketers and distributors to explain the steps they are taking to address both FDA and FTC-related concerns.

Kelley Drye Hosts IAPP Sponsored Data Privacy Day Event

This Thursday, January 25, 2018, Kelley Drye & Warren LLP will be hosting Privacy After Hours, an International Association of Privacy Professionals (IAPP) sponsored event celebrating Data Privacy Day here in Washington, D.C.  Celebrated in the United States since 2008, Data Privacy Day is an international effort to promote awareness about respecting privacy, safeguarding data and enabling trust.

Founded in 2000, IAPP is a not-for-profit organization with a mission to define, support and improve the privacy profession globally. Kelley Drye & Warren LLP is a Corporate Member of IAPP and a nationally-ranked privacy and advertising practice group, including IAPP-certified privacy professionals.

The DC IAPP Privacy After Hours events assemble some of the most interesting privacy professionals from government and industry in the district for a casual and fun get together. We hope you’ll take some time to join us as we celebrate Data Privacy Day. To RSVP, please visit here.

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