NAD recently announced a decision involving Pyle Audio’s campaign to generate reviews for its NutriChef brand vacuum sealers. When consumers received their products, they would find a card promising them two rolls of vacuum sealing bags in exchange for leaving a review on Amazon.com. Near that promise, the card included the words “love this” and an image of five stars. The challenger argued that this presentation suggested that consumers had to leave positive reviews in order to receive the free bags. Moreover, the card did not tell consumers that they had to disclose that they received free products in exchange for the review.

ReviewsNAD started its decision by recapping previous guidance and cases – including this case that we discussed in April – holding that consumers who receive a benefit in exchange for a review should be required to clearly disclose that they’ve received that benefit. Here, Pyle did not take any steps to ensure that consumers made these disclosures. As a result, “consumers reading the reviews are left with the mistaken impression that the reviews are spontaneous . . . .” This violates the FTC’s Endorsement Guides.

In addition, although Pyle may not have explicitly required consumers to leave a positive review to receive the free bags, NAD found that because the offer was coupled with the words “love this” and an image of five stars, consumers could reasonably conclude that a positive review was required. Moreover, the card directed people who weren’t happy to contact the company for help. “Consumers may reasonably understand that that there are two mutually exclusive options — (1) leave a review and get a reward if you are satisfied with the product or (2) contact Pyle if you are not satisfied.”

For future promotions, NAD recommended that Pyle take steps to ensure that consumers disclose that they’ve received a benefit in exchange for the review. Moreover, the company should not suggest that positive reviews are required. As far as existing reviews, NAD recommended that Pyle take reasonable measures to have those reviews taken down or to modify them to include a clear and conspicuous disclosure that the consumer who posted the review received something of value from Pyle.

These types of campaigns are receiving more attention from the FTC and NAD. If your company encourages consumers to write reviews, you should take a close look at FTC guidance and recent cases to ensure that your campaign does not get you in trouble.

Last week, the U.S. Court of Appeals for the Seventh Circuit cannonballed directly into the roiling waters of debate over the Federal Trade Commission’s enforcement powers, when it determined in a closely-watched appeal that the agency does not have the right to restitution under the primary provision the Commission uses to attack fraud — Section 13(b) of the FTC Act.  The decision is certain to lead to other challenges to the agency’s authority, and has set off a high level of speculation about what will happen next.

In Federal Trade Commission v. Credit Bureau Center, the Seventh Circuit held that the FTC could not obtain monetary relief in the form of restitution under Section 13(b). The decision represents a substantial limitation to the FTC’s enforcement power, as the agency previously has sought restitution when bringing deceptive practices claims in federal court.

This is no small deal.  Between July 1, 2017 and June 30, 2018, according to the Federal Trade Commission’s 2018 Annual Report on Refunds to Consumers, the FTC’s Bureau of Consumer Protection obtained 114 court orders totaling $563 million and supported refund programs administered by FTC defendants or another federal agency to deliver more than $2.3 billion in refunds to consumers.

The Credit Bureau Center decision comes just six months after the Third Circuit held in FTC v. Shire Viropharma, Inc. that the FTC cannot bring a case under Section 13(b) unless the FTC can articulate specific facts that a defendant “is violating” or “is about to violate” the law.  In other words, the Third Circuit’s decision in Shire limits Section 13(b) to cases where the FTC is pursuing injunctive relief for existing or impending conduct but not for activity unlikely to reoccur.  Credit Bureau Center goes a good deal further, limiting the type of equitable relief the FTC seeks at the end of a proceeding.

The Shire decision – and other appeals pending before circuit courts focusing on the FTC’s Section 13(b) authority – compelled Commissioner Wilson to note in her May 2019 congressional testimony that “recent decisions have raised questions about our authority that conflict with the clear intent of Congress and long-established case law.”  Commissioner Wilson advocated for an interpretation of Section 13(b) that empowers courts to employ a full range of equitable remedies in cases where the FTC has brought actions – including equitable monetary relief.

Whether Congress might be tempted to step in remains unclear, but what is certain is that the Seventh Circuit’s decision invokes a circuit split that will not be resolved unless the ruling is appealed to the Supreme Court.

“An Implied Restitution Remedy Doesn’t Sit Comfortably”

The facts of Credit Bureau Center are straightforward: Credit Bureau Center placed online advertisements for rental properties that did not exist or that they were not permitted to offer. When potential renters responded to the advertisements, company representatives pretended to be owners of the apartments at issue and sent correspondence offering tours if the renters would first obtain a credit report. The company’s own websites were used to obtain the credit reports.  Although the websites purported to provide the credits reports free of charge, the consumer was unknowingly enrolled into a credit monitoring service with a monthly charge fee.

The FTC brought suit claiming that Credit Bureau Center acted unlawfully and deceived consumers.  In 2017, an Illinois federal court granted summary judgment to the FTC and ordered restitution of $5.2 million to affected consumers.  On appeal, Credit Bureau Center disputed the order, contending (among other things) that the lower court had no authority to impose restitution under Section 13(b), which, according to Credit Bureau Center, only permits the agency to seek injunctions against ongoing unlawful activity.

During oral argument before the Seventh Circuit, Credit Bureau Center asserted that a plain reading of Section 13(b) does not support the FTC’s “unbridled, standardless” authority to pursue measures beyond injunctive relief.  Counsel for the FTC, on the other hand, argued that the panel should follow the Seventh Circuit’s considerable precedent, which supports the agency’s ability to secure all equitable relief under Section 13(b), including restitution.

In the decision, written by Judge Diane Sykes, the Seventh Circuit held that the FTC does not have authority to seek restitution under Section 13(b) – that section of the statute is limited to injunctive relief.   The decision recognized that FTC has long viewed Section 13(b) as allowing for awards of restitution, and that various courts have endorsed that understanding.  Indeed, the Seventh Circuit itself, in FTC v. Amy Travel Service, 875 F.2d 564 (7th Cir. 1989), found that Section 13(b) authorizes restitutionary relief.  [Bill MacLeod, who led the prosecution of Amy Travel while FTC Bureau Director, recalls that there was little doubt at the time that the remedial authority in Section 13(b) included all equitable relief a court could order.]

Still, despite three decades of precedent, the court vacated the restitution award and held that Section 13(b) does not permit such relief.  The court relied on Meghrig v. KFC W., Inc., 516 U.S. 479 (1996) in reasoning that courts must consider whether an implied equitable remedy is compatible with a statute’s express remedial scheme.  Applying Meghrig, the majority concluded that Section 13(b)’s grant of authority to order injunctive relief does not also permit a restitution award, despite thirty years of relevant precedent (“[s]tare decisis cannot justify adherence to an approach that Supreme Court precedent forecloses.”)

The majority undertook a detailed analysis of the FTC’s various enforcement mechanisms, explaining that the FTC adjudicates cases before administrative law judges under its “cease and desist” power inherent in Section 45(b).  The FTC also can preemptively resolve whether certain conduct violates the Act through rulemaking – a process that allows for legal and equitable remedies from violators.

The court found that Section 13(b) was different, as it allowed the FTC to forego administrative adjudication or rulemaking and directly pursue an injunction in federal court.  But by doing so in this case, the agency sought a remedy – restitution – not mentioned anywhere in the statute.  According to the court, the FTC’s argument that Section 13(b) implicitly authorized restitution held no weight.

In sum, reasoning that Section 13(b) allows the FTC to obtain injunctions that halt illegal conduct,  not other forms of equitable relief,  the court determined that its remedy provision must be limited to negative injunctions.  To read the statute in any other way, “would condition the Commission’s ability to secure restitution for past conduct on the existence of ongoing or imminent unlawful conduct” which would be an “illogical implication.”

Tying the FTC’s Hands

In a sharp dissent, Chief Judge Diane P. Wood, joined by two other judges, rebuked the majority both for denying the rehearing en banc and for overturning the long-standing Amy Travel precedent.  First, Judge Wood wrote that no recent Supreme Court decision had demanded such a “sea change” and that the majority effectively “tied the hands of a government agency” without the “careful consideration that plenary en banc review would have provided.”  The dissent criticized the majority’s effort to “trivialize the fact that eight [ ] sister circuits agree with Amy Travel’s holding.”

Judge Wood wrote that decisions from other circuits subsequent to Amy Travel were thoroughly explained and persuasive. The Seventh Circuit’s rejection of such precedent and refusal to rehear the case en banc constitutes error, Judge Wood reasoned. The majority was unfazed: “We recognize that this conclusion departs from the consensus view of our sister circuits. But when deciding whether we should overturn precedent, “[w]e are not merely to count noses. The parties are entitled to our independent judgment.” Quoting United States v. Hill, 48 F.3d 228, 232 (7th Cir.1995).

Regarding the proper interpretation of Section 13(b), Judge Wood’s dissent lambasted the majority’s reasoning. According to the dissent, the FTC Act provides for a “finely crafted system of enforcement powers and remedies” and the majority’s approach “upends what the agency and Congress have understood to be the status quo for thirty years.” The dissent disputed that the majority adopted a “textualist” view of the statute.  “If the text is overwhelming at all,” the dissent reasoned, “I find it overwhelmingly to support the power of the FTC to use any of the tools that Congress gave it . . .”

A close examination of the FTC Act, Judge Wood wrote, reveals that Congress expressly decided to give the agency a “menu” of options: the FTC has the ability to move unilaterally when it uses its rulemaking or cease-and-desist powers, and to act as a party before the court if it seeks a preliminary or permanent injunction. Unambiguously, the dissent then states: “It is not up to us to take away that which Congress gave.”

Judge Wood’s dissent also distinguished the majority’s reading of Meghrig.  Even Meghrig did not purport categorically to exclude an order to make payments from injunctive relief – and that case involved private plaintiffs. The dissent called it “remarkable” that the majority could interpret the decision to impose such a limitation on the relief that a government plaintiff, such as the FTC, could seek.  In sum, the dissent concludes that “nothing in Meghrig, and nothing in the cases following Meghrig, comes close to holding that a government agency acting pursuant to express authority to seek injunctive relief cannot ask for a mandatory injunction requiring turn-over of money.”

What’s Next?

Well, that remains to be seen, although it is a safe bet that this is not the final word when it comes to the reach of Section 13(b).  Congress could step in and write restitution into the FTC Act, as Commissioner Wilson has suggested.  There is likely to be a lot of noise around the Section 13(b) issue following the Seventh Circuit decision and many legislators on both sides of the aisle likely will agree with Chief Judge Wood that reading mandatory equitable powers out of Section 13(b) is not the right result, particularly when dealing with the FTC’s fraud program.  And, of course, the majority in Credit Bureau Center would agree that a legislative approach would be the correct course (“[i]t is now well settled that Congress, not the judiciary, controls the scope of remedial relief when a statute provides a cause of action.”).

It also seems likely that the FTC will seek certiorari – how could it not?  In fact, the FTC has done it before when a Seventh Circuit decision went against the agency, obtaining a unanimous reversal in FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986).  You would imagine that the FTC would be anxious to line up with sympathetic circuits here and resolve this issue once and for all.

A larger concern relates to the “brazen scammers,” as characterized by Chief Judge Wood.  Without the threat of having to return ill-gotten gains and redress consumer injury, will their breed proliferate, causing substantial consumer injury?  Or, as the majority in Credit Bureau Center seems to contend, should this not be a concern, given that Congress has already thought this through and provided the FTC with all the tools it needs?

And is there a middle ground?  In their excellent 2013 Antitrust Law Journal article, former FTC Chairman Tim Muris and Professor Howard Beales in many ways foresaw the current debate and suggested that the FTC and courts work to ensure that there are meaningful limits on the use of Section 13(b) to obtain consumer redress. 79 Antitrust Law Journal No. 1 (2013).  Like the majority and minority here, they relied on the language of the statute, but focused their attention on the statute’s authorization limiting the FTC’s ability to seek a “permanent injunction” only in “proper cases.”  Their suggestion:  “the touchstone for determining a “proper case” is whether a reasonable person would have known that the conduct was dishonest and fraudulent.”  In other words, restitution under Section 13(b) should not be pursued in cases in which it would not be available under Section 19.

How this all will shake out remains an open question.  In the meantime, expect a torrent of motion practice in Section 13(b) cases.  We should also expect the FTC to continue to file Section 13(b) cases seeking restitution in every circuit, except, that is, the Seventh.

Imagine you are perusing the coffee aisle in the grocery store and see a product described as “freshly ground,” “100% Arabica Coffee,” “Hazelnut Crème,” “Medium Bodied,” and “Rich, Nutty Flavor.”  Would you think that the coffee contains hazelnuts?  Should consumers be expected to consult the ingredient list to clarify any confusion?  And what exactly is “Hazelnut Crème?”

The First Circuit addressed these issues in Dumont v. Reily Foods Co., in which a split panel concluded that a reasonable consumer could be deceived into thinking that the product contained hazelnuts when, in actuality, it contained only naturally and artificially flavored coffee.  The court reversed the District of Massachusetts’ dismissal of the plaintiff’s Massachusetts General Law Chapter 93A claim, and permitted the case to proceed into discovery.

Judge William J. Kayatta Jr., writing for the majority, explained that while some reasonable consumers might be motivated to consult the ingredient label on the reverse side of the package, others might “find in the product name sufficient assurance so as to see no need to search the fine print on the back of the package, much like one might easily buy a hazelnut cake without studying the ingredients list to confirm that the cake actually contains some hazelnut.”  As support for this, Judge Kayatta noted that the plaintiff’s complaint set forth that the industry practice—in large part due to federal labeling requirements—is to state on the front of a package containing a product that is nut flavored (but that contains no nuts) that the product is naturally or artificially flavored.

The majority also found ambiguity in the phrase “Hazelnut Crème,” with one judge believing that “‘crème’ was a fancy word for cream, with Hazelnut Crème being akin, for example, to hazelnut butter.”

Finally, the majority held that the plaintiff’s state-law consumer fraud claim was not preempted by the Federal Food, Drug, and Cosmetic Act (“FDCA”), which imposes specific labeling requirements for the coffee product at issue.  The court ruled that such a claim must fit within a “narrow gap” to avoid preemption:  the plaintiff must be suing for conduct that actually violates the FDCA (otherwise the claim would be expressly preempted by the FDCA), but the plaintiff must not be suing because the conduct violates the FDCA (which would be implicitly preempted).  Because the complaint sought “to vindicate the separate and independent right to be free from deceptive and unfair conduct” separate and apart from any alleged FDCA violations, the chapter 93A claim was not preempted.

Former Chief Judge Sandra L. Lynch dissented, reasoning that the package as a whole undermined any reasonable belief that the coffee actually contained hazelnuts:  “the front label plainly states that the package contains ‘100% Arabica Coffee.’  It does not say it contains anything other than coffee.  The package here did not contain any misstatement of its contents, did not feature any pictures or illustrations of hazelnuts, and did not have any error in the ingredient list.”

Judge Lynch then addressed the phrase “Hazelnut Crème,” differentiating between the definition of cream—the oily or butyraceous part of milk—and that of crème—a “‘cream or cream sauce as used in cookery’ or ‘a sweet liqueur.’”  In her opinion, “[i]n the context of a package of ground, dry coffee, . . . the two words, ‘Hazelnut Crème,’ together plainly state the flavoring of the coffee.”  Judge Lynch similarly rejected the majority’s analogy to a hazelnut cake which, presumably, contains multiple ingredients and could very well contain hazelnuts.  In contrast, she noted that reasonable consumers would not approach a package of ground coffee in the same manner, especially one that was prominently labeled as “100% Arabica Coffee.”  Judge Lynch concluded that any consumer who was confused by the label, or specifically concerned with the presence of hazelnuts, could simply consult the ingredient label on the reverse side of the package to confirm the absence of hazelnuts.

While the majority found the case to present a close question for the very reasons set forth in Judge Lynch’s dissent, it ruled that the complaint stated a plausible claim for relief and reversed the lower court’s grant of the defendants’ motion to dismiss.

The First Circuit’s analysis resembles a recent Second Circuit decision involving Cheez-It crackers labeled as “WHOLE GRAIN” or “Made With WHOLE GRAIN” when the predominant ingredient was enriched white flour.  In Mantikas v. Kellogg Co., the Second Circuit concluded that while the product did, indeed, contain some whole grains, a reasonable consumer could be misled into believing that it was the predominant ingredient in the crackers.

While Dumont did not cite the Second Circuit’s opinion, it is based on the same premise that reasonable consumers should not be expected to consult an ingredient list to correct allegedly misleading information on the front label.  Judge Lynch’s dissent, however, cautioned that permitting “meritless labeling litigation” like this one to continue beyond the pleadings stage “will have the effect of driving up prices for consumers” and cause an entirely different type of “harm to the consumer.”  For now, the Dumont decision marks another plaintiff-friendly outcome sure to be relied on by class action plaintiffs in the First Circuit and elsewhere.

Effective January 1, 2020, New Hampshire’s new Insurance Data Security Law will impose certain information security requirements on entities that (1) are licensed under the state’s insurance laws and (2) handle “nonpublic information.” “Nonpublic information” is defined as information that is not publicly available and falls into one of the two following categories:

  1. Information that because of name, number, personal mark, or other identifier could identify a consumer when combined with the consumer’s Social Security number, driver’s license number, financial account number, credit or debit card number, security code or PIN that would permit access to the consumer’s financial account, or biometric records.
  2. Information or data, except age or gender, that can be used to identify a particular consumer and that relates to the past, present, or future physical, mental, or behavioral health or condition of any consumer or a member of the consumer’s family; the provision of health care to any consumer; or payment for the provision of health care to any consumer.

The law will require that licensees:

  • Conduct a Risk Assessment: Conduct risk assessments that identify and mitigate “reasonably foreseeable” internal or external threats to the business and its nonpublic information, including nonpublic information accessible to or held by third-party service providers.
  • Implement an Information Security Program: Use the results of the risk assessment to create an information security program. The program must be managed by the board and detail the licensee’s plan for responding to cybersecurity events (an event “resulting in the unauthorized access to, disruption or misuse of, an information system or nonpublic information stored” on an information system).
  • Respond to Cybersecurity Events: Conduct a “prompt investigation” of all cybersecurity events and, in most circumstances, notify the Insurance Commissioner, within three business days, of any cybersecurity event that has a “reasonable likelihood” of materially harming a New Hampshire consumer or any material part of the licensee’s normal business operations. This notice must include specific information, including a copy of the licensee’s privacy policy.

The law includes a limited safe harbor for companies that are in compliance with HIPAA if the licensees have established and maintained HIPAA-required privacy, security, and data breach notification programs and procedures to protect both “protected health information,” as defined by HIPAA, and any other nonpublic information. The companies must submit written statements indicating that they (1) are HIPAA-compliant; and (2) protect any other nonpublic information in the same way that they do protected health information. These companies are still required to comply with the Insurance Data Security Law’s cybersecurity event notification requirements.

The law provides for additional limited exemptions for companies complying with other laws, including the New York Cybersecurity Regulation.

Licensees have one year from the effective date to comply with the risk assessment and information security program requirements, and two years from the effective date to ensure that third-party service providers are implementing appropriate security measures.

We recommend that companies take steps now to assess the applicability of the statute and determine how to best integrate its requirements into existing business practices.

Amendments to the California Consumer Privacy Act (CCPA) continued to advance on Monday, as the California legislature returned from its summer recess.  With just five weeks to go until the September 13th deadline for the legislature to pass bills, and fewer than five months until the CCPA is set to take effect, the Senate Appropriations Committee gave the greenlight to six bills: AB 25, AB 846, AB 1564, AB 1146, AB 874, and AB 1355.  The bills were ordered to a “second reading,” meaning they head to the Senate floor for consideration without a further hearing in the Senate Appropriations Committee.  Two of those bills, AB 874 and AB 1355, will be placed on the Senate’s consent calendar, because they have not been opposed.

The Senate Appropriations Committee also voted to advance AB 1202, the data broker amendment, but placed the bill in the Committee’s suspense file.  This procedural action holds bills that will have a significant fiscal impact on the State of California’s budget for consideration all at once to ensure that fiscal impacts are considered as a whole.

Here’s the full list of amendments as of August 12, 2019:

Ordered to Second Reading in the California Senate

  • EMPLOYEE EXEMPTION: Assembly Bill 25changes the CCPA so that the law does not cover collection of personal information from job applicants, employees, business owners, directors, officers, medical staff, or contractors.
  • LOYALTY PROGRAMS:Assembly Bill 846 provides certainty to businesses that certain prohibitions in the CCPA would not apply to loyalty or rewards programs.
  • CONSUMER REQUEST FOR DISCLOSURE METHODS:Assembly Bill 1564 requires businesses to provide two methods for consumers to submit requests for information, including, at a minimum, a toll-free telephone number.  A business that operates exclusively online and has a direct relationship with a consumer from whom it collects personal information is only required to provide an email address for submitting CCPA requests.
  • VEHICLE WARRANTIES & RECALLS: Assembly Bill 1146 exempts vehicle information retained or shared for purposes of a warranty or recall-related vehicle repair.
  • PUBLICLY AVAILABLE INFORMATION: Assembly Bill 874streamlines the definition of “publicly available” to mean information that is lawfully made available from federal, state, or local government records. The bill also seeks to amend the definition of “personal information” to exclude deidentified or aggregate consumer information.
  • CLARIFYING AMENDMENTS:Assembly Bill 1355 exempts deidentified or aggregate consumer information from the definition of personal information, among other clarifying amendments.

Placed on Suspense File of the Senate Committee on Appropriations

  • DATA BROKER REGISTRATION: Assembly Bill 1202requires data brokers to register with the California Attorney General.

CBD marketers can learn something from the food industry.  And it has nothing to do with the regulatory morass around whether CBD can be legally added to foods.  It’s about managing the risk of consumer false advertising litigation.  Lawsuits filed in California and New York help illustrate what kinds of cases are already being brought and suggest that broader food and beverage litigation trends are likely to be instructive.

In Horn v. Medical Marijuana, Inc., plaintiffs, a truck driver and his wife, purchased and consumed a hemp-based cannabidiol (CBD) oil manufactured and distributed by defendants.  Plaintiffs claimed that the CBD oil product caused the truck driver to fail a drug test administered by his employer, which in turn resulted in him losing his job.  Plaintiffs attempted to recover from defendants on several claims, including false advertising and deceptive business practices.  Plaintiffs relied on four sources of information from defendants: (1) an article in High Times magazine, (2) YouTube videos, (3) the seller’s website, and (4) a call to the seller’s 1-800 number.  The last three sources stated that CBD did not contain THC, and the magazine article stated that the hemp used to extract CBD from contained less than 0.3% THC in accordance with federal definition of “hemp”.

Under New York law, the “false advertising” and “deceptive business practices” statutes are limited in their territorial reach, and to qualify as a prohibited act under the statutes, the consumer deception must occur in New York.  Interestingly, despite the fact that plaintiffs viewed all of defendants’ sources of information while in New York and the CBD product was shipped to and consumed in New York, the court held that the statutes did not apply because the transaction was out-of-state.  Defendants were not located in New York and no part of the online transaction took place in New York. The case is now on appeal.

In a similar California case, Thurston v. Koi CBD, LLC, plaintiff Thurston purchased CBD vape juices from defendant believing that the products could help treat or mitigate her knee pain.  She also believed she would not fail her employer’s drug test because the products were labeled and promoted as having 0% THC and as being THC FREE.  After using defendant’s products, Thurston was given a random drug test by her employer, which came back positive for cannabinoids, and she lost her job as a result.  On April 8, 2019, Thurston filed a class action lawsuit against defendant claiming violations of the “Unlawful” and “Unfair” prongs of the California State Unfair Competition Law, the California Consumer Legal Remedies Laws, and the Pennsylvania Unfair Trade Practices and Consumer Protection Law.  The case is currently pending in the Superior Court of the State of California for the County of Los Angeles.

The lesson for CBD marketers is this:  Setting aside the employment issues in these cases, the plaintiffs’ bar is likely to scrutinize CBD labels with the same skeptical eye they have taken to the food and beverage industry in recent years.  While we do not know whether the products at issue in these cases were accurately or falsely advertised, it’s fair to say that scrutiny on the advertising claims at issue were foreseeable based on what we’ve seen in the food and beverage space.  Terms such as “free,” “0%,” health claims, “free from”-type claims, and processing claims such as “organic” have been frequent targets in consumer class litigation.  As the CBD industry grows, marketers will want to understand and follow these trends to fully evaluate risk.

 

If a review site ranks your product as the top in a category, can you advertise that you’re “number 1” in that category? Not necessarily. A recent NAD decision explains why.

A competitor challenged TaxSlayer’s claim that it was “#1 Rated in the Tax Prep Software Category on Trustpilot.” NAD started its decision with a reminder that “a TaxSlayer Adclaim that is expressly truthful can still be misleading” if it conveys a message an advertiser can’t support. Here, NAD found that the claim suggested that the “rating was based on a reliable and representative survey of consumers using products across the entire tax preparation software category.”

NAD found that the survey did not meet this standard for a number of reasons. Here are some of the highlights:

  • To support a claim that a product “number 1” within a category, an advertiser should generally compare itself to at least 85% of the relevant market. There was no evidence to suggest that happened here.
  • Customers who are surveyed should be representative of the broad base of customers who use the product. NAD determined that the survey failed in this regard because Trustpilot collects reviews for programs sold by companies with whom it has a relationship at much higher rates than for those with whom it does not. Indeed, the market leader in tax preparation software – who does not have a relationship with Trustpilot – had only 15 reviews, compared to over 2,500 reviews for TaxSlayer.
  • NAD was not convinced by TaxSlayer’s argument that consumers could simply visit the Trustpilot website to clarify any confusion about the ranking. “If a claim needs to be qualified to prevent it from being misleading, any disclosure should be clear and conspicuous and found within the four corners of the advertising in which the claim appears.” Consumers should not be forced to search for information.
  • Trustpilot lacked various controls that are needed for a reliable survey. For example, Trustpilot could not verify that all reviews were submitted by consumers who actually purchased the products, and it did not have a mechanism to prevent consumers from submitting multiple reviews. Moreover, because Trustpilot used a proprietary system to weight reviews, NAD couldn’t fully evaluate the rankings.

After the challenge was filed, TaxSlayer changed its claim to read that it was “rated #1 in the tax prep software category on Trustpilot among companies with 3,500+ reviews.” Although this was arguably true – indeed, TaxSlayer was the only company with over 3,500 reviews – NAD found the claim to be misleading because consumers will reasonably assume that there is more than one company in that category.

Advertisers should be careful about making comparative claims based on review data from third-party sites. Even if a claim is literally true, it could be deemed misleading if an advertiser can’t prove that the site’s mechanisms for compiling and reporting reviews meets NAD’s high standards.

Last year, we posted that Snapchat’s public relations firm had filed a lawsuit against an influencer who allegedly failed to comply with the terms of his agreement.

According to the agreement, Luka Sabbat was required to make four unique posts, get those posts approved beforehand, send analytics to the firm, and be Lukaphotographed wearing the Spectacles in public at Paris and Milan Fashion Weeks. In exchange for all of this, PR Consulting agreed to pay $45,000 up front, plus another $15,000 later. According to the complaint, Sabbat did not comply with all of the requirements and refused to return the $45,000.

The case settled this week, with Sabbat agreeing to pay $15,000. Sabbat’s troubles aren’t over, though, because he is facing a separate lawsuit from another company that similarly claims he failed to live up to an agreement.

Streetwear brand Konus entered into a deal with Sabbat in 2017, under which it paid him $30,090 to participate in a photo shoot for its Fall/Winter Look Book, and to post two images on Instagram. Although Sabbat participated in the photoshoot, Konus alleges that he did not post the images on Instagram. The company is seeking $40,000 in damages.

Payment terms are often negotiated in influencer agreements. Influencers obviously want more up-front, while companies prefer the opposite. While the parties usually end up somewhere in the middle, these cases illustrate the risks companies face by paying too much before key milestones have been reached. If the influencer breaches the agreement, it can become difficult to get the money back.

A label contains an accurate net weight of the amount of product inside.  The packaging is clear, allowing consumers to view a pump mechanism common in the cosmetics world.  So, where’s the deception?

According to the Southern District of New York – there is none.  In Critcher et al. v. L’Oreal USA, Inc., et al., 1:18-cv-05639 (S.D.N.Y.), the Court recently held that reasonable consumers would not be deceived by a cosmetics bottle utilizing a pump dispense mechanism.

The plaintiffs claimed that the pump mechanism prevented them from being able to access the entire product inside of the bottle.  But Judge Koeltl was not swayed.  He held that consumers are familiar with pump dispensers on personal care products such as soaps, shampoos and lotions, and are therefore aware that “they will not be able to extract every bit of product from such containers.”  Accordingly, the court held that a “reasonable consumer” would not be deceived by the packaging of the products, and that plaintiffs’ alleged “disappointment” did not “establish deception” or “transform [L’Oreal’s] accurate labeling of the product’s net weight into fraud by omission.”

The Court also found that plaintiffs’ claims were preempted by the Federal Food, Drug and Cosmetics Act (FDCA).  Because federal law permits – and requires – L’Oreal to label its cosmetics products with the net quantity of the containers’ contents irrespective of the amount accessible through the pumps, the labels followed the “federal regulatory scheme [that] addresses measurement and labeling of product quantity head-on.”  And since plaintiffs were seeking labeling that was different from the labeling requirements set forth in the FDCA, their claims were expressly pre-empted.

The Critcher decision comes on the heels of two recent dismissals of slack fill class actions in the Southern District.  Last year, Ad Law Access covered Daniel, et al. v. Tootsie Roll Industries LLC, Case No. 1:17-cv-07541, 2018 WL 3650015 (S.D.N.Y. Aug. 2, 2018), in which plaintiffs claimed that different-sized boxes of Junior Mints contained between 35 to 43 percent of empty air.  Judge Buchwald rejected these allegations, finding that no reasonable consumer would have been deceived because the Junior Mints boxes “provide more than adequate information for a consumer to determine the amount of product contained therein” and that the weight of the candy was “prominently displayed on the front” of each box.  Id. at *11-12.  Judge Buchwald then questioned the validity of slack fill cases more generally where the product’s label accurately reflects the weight of the product:  “[C]onsumers are not operating on a tabula rasa with respect to their expectations of product fill.  To the contrary,…‘no reasonable consumer expects the weight or overall size of the packaging to reflect directly the quantity of product contained therein.’….The law simply does not provide the level of coddling plaintiffs seek, [and] the Court declines to enshrine into the law an embarrassing level of mathematical illiteracy.”  Id. at *13.

Similarly, in Hu v. Iovate Health Sciences, U.S.A., Inc., 2018 WL 4954105 (S.D.N.Y. Oct. 12, 2018), plaintiff alleged that a protein powder sold by the defendant was packaged in containers that were not adequately filled, yielding a slack fill of 41 percent, but conceded that the package accurately disclosed the amount of protein powder inside.  Citing Daniel, Judge Ramos stated that “generally, courts within this District have found that labels on packages that clearly indicate the product’s weight prevent plaintiffs from succeeding on non-functional slack-fill claims.”  Id. at *2.  Given the accuracy and prominence of the label’s statement of net weight, Judge Ramos concluded “that the allegedly nonfunctional slack fill would not mislead a reasonable consumer acting reasonably under the circumstances.”  Id. at *3.

*                      *                      *

The Critcher decision marks another welcome victory for cosmetics and consumer product companies, and demonstrates that judges (at least those in the Southern District) are viewing slack fill claims with increasing skepticism and willing to dismiss them at the pleadings stage.

Make a product that could break? On July 16, 2019, the FTC hosted a workshop to examine repair restrictions on consumer goods and the “Right to Repair” bills proposed in a number of states. Panelists included representatives from trade associations, the repair and technology industries, and state senators. The Nixing the Fix workshop discussed some of the issues that arise when a manufacturer restricts access or makes it impossible for a consumer or an independent repair shop to make product repairs, and whether such restrictions infringe consumers’ rights. 

The discussion during the workshop coalesced around three themes: what is broken, the nature of the repair, and who will conduct the repair. Manufacturer representatives argued that products are getting more sophisticated and therefore more dangerous to fix. They also stated that third party replacement parts and services may be of lower quality and could affect the safety, security, and performance of the product. Manufacturers could face increased liability in connection with the third party parts and services. In addition, requiring reparability of devices could stymie innovative features such as the slim battery.

Consumer advocates urged that manufacturers should sell legitimate parts to repair shops and factor reparability into the design of the product. They asserted that some manufacturing changes (such as gluing in a battery, or epoxying an entire product shut) have limited or no innovative advantages and are done in large part to prevent consumers from fixing their own devices. As a result, consumers are forced to purchase new products.

Panelists proposed a few approaches to address these issues:

  • Require manufacturers to release their product information. Many manufacturers already provide their certified repair shops with information on their products and how to repair and replace defective parts. Consumer and repair shop advocates believe that this information should be shared with everyone.  
  • Allow consumers to pay for reparability. One panelist argued for a federally mandated repair score, which would indicate how much of the product is reparable. Consumers could then choose between a repairable and a non-repairable device, and that the products should be priced accordingly. 
  • Right to Repair bills.  Twenty states have considered right to repair legislation, though some of these bills are no longer active.

In opening and closing remarks, the FTC thanked all in attendance for their participation on this issue and urged all interested stakeholders to submit comments on this issue for agency review. Comments may be filed until September 16, 2019, electronically or in written form. The FTC will consider the comments to inform potential next steps, such as issuing federal guidance on the right to repair standard.