FCC Public Notice Requests Stakeholders to Sound Off on Soundboard Technology

Last week, the Federal Communications Commission (“FCC”) issued a Public Notice seeking comment on a petition for an expedited declaratory ruling relating to how the Telephone Consumer Protection Act (“TCPA”) applies to the use of soundboard or avatar technology. Specifically, the FCC requests comment on whether “calls using recorded audio clips specifically selected and presented by a human operator in real-time, a tool generally referred to as ‘soundboard technology,’ do not deliver a ‘prerecorded message’ under the [TCPA].” Comments are due on March 15, 2019; the reply comment deadline is March 29, 2019.

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FTC Opts Out of Canning the CAN-SPAM Rule

In June 2017, the FTC initiated a regulatory rule review of the Controlling the Assault of Non-Solicited Pornography and Marketing Rule (“CAN-SPAM Rule” or “Rule”), seeking information about the Rule’s costs and benefits as well as its economic and regulatory impact. The FTC received 92 responses to its request for public comment. Last week, the FTC announced it had completed its review of the Rule and public comments it received, and decided to keep the Rule exactly as it is.

The CAN-SPAM Act (“Act”) became effective as of January 1, 2004. The Act regulates the transmission of all commercial email messages and authorizes the FTC to issue regulations concerning certain provisions of the Act. Pursuant to this authority, the FTC promulgated the CAN-SPAM Rule, which has evolved in a number of significant ways since 2004. Key provisions of the Rule require that commercial emails: (1) contain accurate header and subject lines; (2) identify themselves as advertisements; (3) include a valid physical address; and (4) offer recipients a way of opting out of future messages.

Beyond a general request for comment recommending modifications to the Rule, the FTC also sought comment in response to three specific issues—whether the FTC should: (1) expand or contract the categories of messages that are treated as “transactional or relationship messages”; (2) shorten the time period for processing opt-out requests; and/or (3) specify additional activities or practices that constitute “aggravated” violations. Based on the comments it reviewed, the FTC concluded that a continuing need exists for the Rule, the Rule benefits consumers, and the Rule does not impose significant costs to businesses. With respect to the three specific issues outlined above that the FTC also sought comment on, the FTC determined no rule modification was warranted.

Although the FTC decided retain the CAN-SPAM Rule without modification, in light of the breadth of concerns raised in the public comments, the FTC plans to review its consumer and business education materials to determine if any revisions are warranted. In the meantime, the FTC has maintained the status quo. Should you have any questions regarding your business’ compliance with the CAN-SPAM Rule, the Venable team is here to provide guidance.

FTC and FDA Issue Warning Letters to Supplements Companies

Earlier this week, the FTC and the FDA announced a joint effort to combat unsubstantiated health claims in the supplement space. In three warning letters—to Gold Crown Natural Products, TEK Naturals, and Pure Nootropics, LLC (collectively, the “Companies”)—the agencies explain that certain efficacy claims may lack competent and reliable scientific evidence for support. Specifically, the Companies’ claims pertain to treating Alzheimer’s and remediating or curing other serious illnesses, including Parkinson’s, heart disease, and cancer. The FDA issued the letters the same week it announced an effort to modernize its oversight over dietary supplement products. Taken together, these two actions reinforce that the agency appears to be trying to differentiate participants in the supplement space.

The letters warned that the companies were making drug claims in violation of Section 201(g)(1)(B) of the FD&C Act and unsubstantiated disease claims under Section 12 of the FTC Act. Under the FTC Act, it is unlawful to make health claims that a product can prevent, treat, or cure human disease without competent and reliable scientific evidence to substantiate such claims. This standard can also entail a need for well-controlled human clinical studies. With respect to its review of the Companies’ websites and social media accounts, the FTC pointed to a number of exemplary claims that likely require substantiation. However, the FTC made clear that the examples are not exhaustive, urging the Companies to thoroughly review all claims and ensure they have adequate substantiation.

The agencies gave the Companies fifteen days to notify the FTC and FDA of the specific actions the companies will take to address the concerns outlined in the warning letters. Absent curative action, enforcement action is likely. Similar actions against other companies may be in the wings. Stay tuned.

BlueHippo in the Red? Not on the FTC’s Watch

Several high profile bankruptcies have occurred in recent years. Most would consider a bankruptcy proceeding a last resort. But some, seeking to expunge a debt, have contemplated that bankruptcy may be a safe way to avoid the long-arm of the law. The Federal Trade Commission, however, has taken great steps to ensure that an FTC judgment firmly stays on a wrongdoer’s balance sheet. In late December of last year, the FTC convinced a bankruptcy court that a party subject to a contempt order could not shield itself from the FTC’s collection efforts by filing for bankruptcy.

First, a little background: In 2008, the FTC settled its lawsuit against BlueHippo Funding LLC, BlueHippo Capital LLC (together, “BlueHippo”), as well as the sole owner of both companies, Joseph Rensin. The FTC alleged that the defendants offered to finance the sale of personal computers to consumers with low credit ratings, and that they violated, among other laws, the FTC Act by failing to clearly disclose that consumers’ payments were not refundable. BlueHippo agreed to a settlement that included a monetary judgment of at least $3.5 million and up to $5 million. The order also prohibited the defendants from making any representation regarding any refund policy “without disclosing clearly and conspicuously, prior to receiving any payment from customers all material terms and conditions” of any refund. Mr. Rensin was not a party to the order.

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DOJ Reverses Course on the Wire Act, Changing the Odds on the State-Regulated Gambling Industry

The regulatory framework for online gambling recently took a wild turn when the Department of Justice Office of Legal Counsel (“OLC”) announced its view that the Wire Act (18 U.S.C. § 1084) applies to all forms of gambling—not merely sports betting. This marked a 180-degree reversal from the stance the OLC took just seven years earlier. The OLC’s 2011 opinion—which itself departed from public positions the DOJ had previously taken—was the foundation upon which today’s state-regulated online gambling industry is built. Four states—Delaware, Nevada, New Jersey and Pennsylvania—currently allow online gambling, and Michigan came close to legalizing it at the end of last year, although outgoing Governor Snyder vetoed the bipartisan bill in a surprise move. The OLC’s follow-on announcement gives now-unlawful online gambling businesses 90 days to bring their operations into compliance with federal law before Wire Act enforcement will begin under this newly expanded view. Below, we contemplate what enforcement of the industry will look like in light of this recent announcement.

Perhaps we will see a Cole memo-esque enforcement regime, where the feds will exercise discretion not to prosecute well-behaved online gambling businesses operated in accordance with robust state regulatory frameworks. After all, legal online gambling businesses and their service providers are already subject to extensive vetting, and in Delaware, online gambling is state-run. Regardless, we expect the DOJ to publish internal guidelines for how the feds should prosecute cases—this is a model that has been used in other areas, and would presumably outline the specific factors under which proposed enforcement would be reviewed and approved.

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NY AG Finds Use of Bots, Sock-Puppets Illegal

Astroturf was again in the news last week, but not because the big game whose name we can’t mention was played on synthetic turf. Rather, last week, the office of the NY Attorney General (“AG”) announced it reached a precedent-setting settlement with artificial engagement company Devumi LLC and related companies (“Devumi”) over the selling of fake followers, likes, and influencer messaging (a/k/a “astroturfing”). Venable has been tracking the NY AG office’s assault on similar companies engaged in astroturfing for over five years. According to the press release, however, this is the first finding by a law enforcement agency that the sale of fake social media engagement and the use of stolen identities to perpetuate such online engagement is illegal.

Devumi utilized two types of accounts to carry out its large-scale astroturfing operation. Computer-operated accounts (“bot accounts”) and accounts controlled by one person pretending to be many other people (“sock-puppet accounts”) allowed Devumi to sell fake followers, likes, and other activity across platforms such as YouTube, Twitter, and Pinterest. The social media engagement looked like the real thing—it appeared to express genuine opinions of real people. In fact, some of the fake accounts were derived from copies of real people’s social media accounts, using their photos, profile text, and more—of course, without that real person’s knowledge or consent. Using this façade, the artificial engagement aimed to deceive online audiences and the public.

Beyond the bot and sock-puppet accounts, Devumi also sold endorsements from social media influencers but failed to disclose any material connection. The NY AG office found this “especially troubling,” because the high visibility of influencers and their opinions can translate into appreciable changes in viewers’ opinions and spending habits. These deceptive marketing tactics had consequences on the brand side as well—according to the AG’s findings, Devumi’s astroturfing influenced advertisers’ sponsorship decisions. Interestingly, Devumi even deceived some of its own customers, who mistakenly believed they were purchasing authentic endorsements.

While it is clear that Devumi broke Venable’s golden rules for influencer marketing, that this settlement came from a state law enforcement agency leaves open the question of how this would play out at the federal level. We’ll be sure to continue tracking this issue—stay tuned.

New Automatic Renewal Law Takes Effect in D.C.

Everyone thinks that when the federal government shuts down, nothing happens in Washington. Not true. Last week, following in the footsteps of other states, the District of Columbia passed a new law regulating automatic renewal offers. The law affects all companies that sell goods or services pursuant to a contract that automatically renews at the end of a definite term. Although the law mirrors other states’ laws in some respects, it creates much stricter requirements in others.

First, similar to other states’ requirements, the law requires advertisers who sell goods or services on an automatic renewal basis to clearly and conspicuously disclose the automatic renewal provision and cancellation procedure in the contract.

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Think Asterisks Don’t Matter?*

Every brand that has designed a product label has felt the call of the asterisk. Visual real estate on packaging and in advertisements is limited, and marketing departments often groan at the piles of clumsy language that legal departments insist make it onto the page. But the elegant solution—dropping an asterisk and including the disclaimers, clarifications, or required disclosures in tiny print at the bottom—has traditionally drawn the ire of regulators or private plaintiffs who complain that such disclosures are ineffective because nobody actually reads them. Now, a line of California federal court cases has begun taking the plaintiffs’ argument at their word, and not in a way that class plaintiffs like: by using Federal Rule of Civil Procedure 9(b) to dismiss complaints that don’t specifically allege whether or not a consumer followed an asterisk and weighed the information in the disclaimer.

In Anthony v. Pharmavite, No. 18-CV-02636-EMC, 2019 WL 109446 (N.D. Cal. Jan. 4, 2019), the court examined a purported class action by consumers allegedly misled into buying biotin supplements labeled with the claim, “May help support healthy hair, skin and nails.” According to the plaintiffs, the average human already obtains a surfeit of biotin in his or her daily life and any amount beyond what can be synthesized is automatically flushed from the body. Indeed, according to the plaintiffs’ studies, “99.9962 percent of people have no possibility of benefiting” from biotin supplements. Only those with exceedingly rare genetic disorders, the plaintiffs explained, could possibly derive any material benefit from supplemental biotin.

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Mastercard Targets Negative Options In 2019 – Demands Transparency

As 2019 goes into full swing, it’s important for providers of payment processing services (referred to here as “acquirers”) and their merchants or submerchants to prepare for the various regulatory and industry changes coming this year. One such significant change comes in the form of Mastercard’s updated rules for negative option billing programs.

Set to take effect on April 12, 2019, Mastercard’s new rules will tighten consumer protection requirements for negative option merchants and their acquirers that process Mastercard transactions. Several laws such as the Electronic Fund Transfer Act, the Restore Online Shoppers’ Confidence Act, and various state laws already apply to negative option billing programs, but Mastercard’s new rules go even further. Among other things, the rules include a requirement for merchants to notify consumers at the end of a trial period before charging the consumer.

Applicability

Notably, the new rules cover any card-not-present transaction where the consumer purchases a subscription to automatically receive a physical product (such as cosmetics, healthcare products, or vitamins) on a recurring basis. Fully digital services are not covered.

This means the rules apply to free trial offers and most forms of negative option programs involving product sales. The negative option plan may be initiated by a free trial, nominally priced trial, or no trial at all. However, if a trial is used, special rules apply to ensure the consumer is aware of and consents to subsequent payments at the trial’s conclusion.

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SCOTUS Instructs Courts to Enforce Parties’ Agreements with Respect to Arbitrability

Do you know what your arbitration provisions say about arbitrability? If not, now is a good time to review them in light of the U.S. Supreme Court’s unanimous decision this week in Henry Schein, Inc. v. Archer & White Sales, Inc. holding that, where parties have entered into an arbitration agreement, and that agreement clearly delegates to an arbitrator the question of which disputes must be arbitrated (i.e., questions of “arbitrability”), courts must enforce those terms and permit the arbitrator – not the judge – to determine whether the specific dispute in question will proceed in arbitration or in court.

The case was filed in Texas federal court by Archer and White (“Archer”) after its relationship with Henry Schein, Inc. (“Schein”) soured. Archer, a dental equipment distributor, entered into a contract with Pelton and Crane (“Pelton”) to distribute dental equipment manufactured by Pelton. Archer thereafter sued Pelton’s successor-in-interest and Schein alleging violations of federal and state antitrust laws, seeking both monetary damages and injunctive relief.

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