Today only, read our blog for free!

Well actually, it’s always free.  But have we just opened ourselves up to a class action lawsuit in California?  Perhaps.

According to the Ninth Circuit, the term “Discount Sale” provides consumers with important information about a product’s worth and prestige.  Falsely labeling a product’s “original price” as its “sale price” could, consequently, subject retailers to liability under California’s unfair competition and advertising laws.

In a recent case, a California plaintiff alleged that he purchased merchandise listed as “on sale” from a discount department store.  He stated that he would not have bought the merchandise had he not been misled by in-store price advertisements which indicated that the merchandise had been marked down from its “original” price; when, in fact, the “sale” price was allegedly the “original” price at which the store normally sold the products.

The retailer successfully moved to dismiss the case in district court arguing that the plaintiff did not satisfy California’s standing requirements under the Unfair Competition Law (UCL), Fair Advertising Law (FAL), and Consumer Legal Remedies Act (CLRA).  In 2004, California passed Proposition 64, which restricts standing for individuals alleging UCL and FAL claims to persons who “suffered injury in fact and have lost money or property as a result of the unfair competition.”  The retailer stated that under Proposition 64 the plaintiff did not “suffer an injury in fact,” or lose money or property because the plaintiff acquired the merchandise he wanted at the price that was advertised.  The retailer argued that the case should be dismissed based on lack of standing, even if the price advertised falsely represented a “sale.”

Plaintiff moved for reconsideration based on the California Supreme Court’s recent decision in Kwikset v. Superior Court.  In Kwikset, the California Supreme Court held that purchasers of goods falsely labeled “made in the U.S.A.” had standing to sue under the UCL and FAL when the purchasers alleged that the false labeling induced them to purchase goods that they would not have purchased otherwise.  The district court, however, denied reconsideration and concluded that Kwikset applied only to false advertisements regarding a product’s “composition, effects, origin, and substance.”

The Ninth Circuit disagreed with the district court’s narrow reading of Kwikset.  It stated that such a test eliminated consumers’ ability to bring UCL and FAL claims for other misleading marketing practices that have little to do with a product’s “composition, effects, origin, or substance.”  The Ninth Circuit held that if a customer purchases merchandise on the basis of false price information, and alleges that he or she would not have made the purchase but for the misleading information, that constitutes an economic injury sufficient to satisfy standing.  The court also stated that plaintiffs do not need to separately plead how much they would have paid for the merchandise had they known its true market value.

While the Ninth Circuit’s decision  potentially leaves retailers who consistently discount vulnerable to unfair competition and false advertising lawsuits, it remains to be seen how much litigation really will follow.  Kwikset threatened to make way for an avalanche of lawsuits under California’s strict “made in U.S.A.” standards.  But to date no such avalanche has occurred.  Regardless, retailers may be wise to exercise caution when it comes to pricing claims in California.

 

*Laura Arredondo-Santisteban is a Venable summer associate and not admitted to practice law.

Late last month, a federal judge in California ruled that a consumer had consented to receive text messages when he voluntarily gave his cellphone number to PayPal. The plaintiff had agreed to PayPal’s user agreement when he became a PayPal customer in 2002. At that time, the user agreement did not have any reference to phone calls placed by PayPal to its customers; however, it did state that the agreement was subject to change without prior notice. In 2008, PayPal changed the terms of its user agreement so that it could contact its customers’ cell phones using an autodialer or prerecorded message. Plaintiff, who claimed that he did not read this revised user agreement, added his cell phone number to his account and immediately received a text message from PayPal. He subsequently brought suit, arguing that PayPal sent him an unsolicited text message to his cell phone without prior express consent, in violation of the Telephone Consumer Protection Act (“TCPA”). The court, although “hesitant to find that plaintiff could have provided his consent through a revised user agreement of which he was never made aware,” nonetheless granted PayPal’s motion for summary judgment on the basis that plaintiff did consent to receive text messages simply by providing his phone number to the company.

This case adds to the growing number of cases that have grappled with the TCPA’s prior express consent requirement. In fact, just a few weeks prior to the PayPal case, a Florida federal district court rejected the argument that the mere act of providing a phone number constitutes consent in the debtor-creditor context. In light of this uncertain landscape, companies would be wise to obtain consent that is clear and unmistakable, rather than rely on “implied” consent through an individual’s conduct.

And, keep in mind that the game changes completely in October 2013, when new Federal Communications Commission rules will require that companies have “prior express written consent” before using an autodialer to call or text consumers for marketing purposes. Under this new standard, prior express written consent must be in writing, bear the signature (or electronic signature) of the person to be called or texted, list the phone number to which calls or texts may be made, and contain a clear and conspicuous disclosure informing the consumer that calls will be made using an autodialer and that the person is not required to provide consent to receive such calls or texts as a condition of making a purchase. With these new requirements, the mere provision of a phone number will clearly not suffice as consent.

On Friday, the White House announced President Obama will nominate Terrell McSweeny to fill the open Democratic commissioner seat at the Federal Trade Commission. Ms. McSweeny is no stranger to Washington or politics, having worked in government and on political campaigns for almost a decade.

Shortly after graduating from Harvard University, Ms. McSweeny worked on the Gore/Lieberman campaign as assistant to the national spokesman. She returned to Washington after the election to pursue a law degree at Georgetown University Law Center. She then worked as an associate at O’Melveny & Myers before becoming the Deputy Director of Policy for Wes Clark for President in 2003.

McSweeny began work for then-Senator Joe Biden, in 2005, as his Deputy Chief of Staff and as Counsel on the Senate Judiciary Committee. (Former Chairman Leibowitz shared a similar background having close ties to Senator Kohl serving as his chief counsel and as Democratic Chief Counsel to the Antitrust Subcommittee of the Senate Judiciary Committee.) McSweeny transitioned to the Obama campaign with Biden in 2008, to serve as the Issues Director for the Vice President. After the election, Ms. McSweeny worked as Deputy Assistant to the President and Domestic Policy Advisor to the Vice President until 2012. During that time, she blogged on WhiteHouse.gov, mostly related to the administration’s Middle Class Task Force.

For the past year, Ms. McSweeney has served as Chief Counsel for Competition Policy and Intergovernmental Relations in the Antitrust Division of the Department of Justice. In that capacity, she signed the November 2012 antitrust complaint against eBay, alleging eBay and Intuit had entered into an anticompetitive anti-poaching agreement that “prohibited either company from soliciting one another’s employees . . . and, for over a year, prevented at least eBay from hiring any employees from Intuit at all.”

Ms. McSweeney signed off on comments submitted to the Federal Energy Regulatory Commission which cautioned that requiring increased transparency in natural gas markets may “increase substantially the risk of coordination” among companies.  She also signed comments to the Federal Communications Commission in April 2013, encouraging it to promulgate rules that allow for smaller nationwide wireless networks to acquire lower-frequency spectrum.

We would expect with her background that she will focus more of her attention and priorities on competition matters rather than consumer protection, at least initially, but given that the CP side is so interesting (at least to us) it would not be uncommon for a commissioner with a largely antitrust background to spark CP interests be they privacy, advertising or marketing.

Since Chairman Leibowitz stepped down, there has been an equal number of commissioners on either side of the fence – Republican Commissioners Ohlhausen and Wright, and Democratic Commissioner Brill and Chairwoman Ramirez. Once nominated by the President, Ms. McSweeny must be confirmed by the Senate, but assuming all goes well for her during the confirmation process, adding McSweeny will give the Democrats their third seat. As a younger commissioner, it will be interesting to see if Ms. McSweeny embraces social media the way Commissioner Wright has. It is certainly a historic and exciting time for the women of the antitrust and consumer protection bars when for the first time in FTC history there will be four female commissioners and two female Bureau Directors (Debbie Feinstein and Jessica Rich).

 

*John Mavretich is a Venable summer associate and not admitted to practice law.

In many advertising cases, the FTC seeks disgorgement as equitable monetary relief.  We previously wrote about the history of and basis under which the FTC seeks that remedy.  Last week, a decision of New York’s highest court may have changed the landscape on whether there is insurance coverage for advertisers faced with FTC disgorgement claims.

The case concerned J.P. Morgan’s suit against its insurers for coverage for disgorgement paid to the SEC.  In 2006, two years before J.P. Morgan acquired it, Bear Stearns was being pursued by the SEC for a slew of securities law violations.  The SEC sought over $700 million from the failing firm.  Bear Stearns opted not to fight.  Despite their claim that they only kept $16.9 million of their ill-gotten gains, Bear Stearns agreed to settle the case with a payment including $160 million in disgorgement.  J.P. Morgan now claims that its insurance should have covered that disgorgement payment.

Bear Stearns had insurance covering it for liabilities incurred by wrongful acts, but when J.P. Morgan came knocking, the insurance company wouldn’t give them a dime.  The insurers claimed this was not an insurable loss for public policy reasons.  The Appellate Division agreed and dismissed the case, noting that disgorgement wouldn’t be much of a deterrent if insurance companies pick up the tab.  But the Court of Appeals got caught up in a different matter: the fact that Bear Stearns only made a fraction of the money it was forced to cough up to the SEC.  The rest went to its customers.  The court was bothered by the lack of precedent for disgorgement payments that include restitution for money that landed in someone else’s pocket.  Given the increasingly wide net that the FTC casts in its cases in naming as defendants various entities involved in the allegedly illegal conduct, and the effort to hold those entities jointly and severally liable for equitable monetary relief, this decision may provide ammunition for those companies in having their insurers pick up some or all of the tab for disgorgement paid to the FTC.

 

*Emma Wischusen is a Venable summer associate and not admitted to practice law.

On Monday, June 17, Federal Trade Commission (FTC) Chairwoman Edith Ramirez named Jessica Rich as Director of the Bureau of Consumer Protection.  No stranger to the FTC, Rich has served in a variety of commission leadership roles for over a decade.  Rich was the Bureau’s Deputy Director from November 2009 to January 2012.  Since then, she has been the Associate Director in charge of the Division of Financial Practices.

Having also spent 11 years as Assistant and then Associate Director in the FTC’s Division of Privacy and Identity Protection, Rich was praised by then-FTC Chairman Jon Leibowitz as “a nationally recognized expert in the fields of privacy, data and identity protection, and emerging technologies.”

She has handled the development of numerous FTC rules, including the 2000 Children’s Online Privacy Protection Act Rule which “requires operators of Web sites and online services that target children under age 13 to obtain verifiable parental consent before they collect, use, or disclose personal information from children.”  Rich testified that, by 2010, the FTC had brought 14 enforcement actions alleging violation of the rule and “collected more than $3.2 million in civil penalties.”

Rice oversaw “the FTC’s Behavioral Advertising initiative, including development of its Behavioral Advertising Principles and report.”  She also led the FTC’s efforts in obtaining landmark settlements, such as agreements with Google, BJ’s Warehouse, and TJX for bi-annual independent audits for the next 20 years, and enforcing FTC regulations against companies such as Microsoft, Toysmart, Cardsystems, and LexisNexis.

Rich’s presence before congressional committees has focused on consumer privacy issues.  In July 2010, she testified before the Senate Subcommittee on Consumer Protection, Product Safety, and Insurance about the FTC’s concern regarding teenagers’ potential recklessness in disclosing information through digital media and possible FTC regulatory actions to protect their privacy.  In May 2011, she testified before the Senate Subcommittee for Privacy, Technology, and the Law on protecting consumer privacy on new mobile devices.  Most recently, in December 2012, Rich appeared on numerous media outlets to discuss the FTC’s survey of 400 children’s apps that found most failed to gain parental consent before gathering information.

Rich’s appointment has been viewed as a signal that the FTC will likely maintain its focus on crafting and enforcing privacy policies.

 

*John Mavretich is a Venable summer associate and not admitted to practice law.

We don’t have to remind anyone who markets a food product that the number of consumer class actions has grown tremendously.  And nowhere is that perhaps more evident than with the use of the term “natural.”

Does the use of the adjective “artisanal” with respect to food threaten to become the next “natural?”  Perhaps.  But if you’re using that term in your advertising or labeling you may want to give it a second hard look.  Odds are that the class action folks may be doing so as well.

A recent network report looked at the proliferation of food products that are described as artisan or artisanal. (The report claims it is over a $1 billion business.)  But not before quoting a definition of artisan that conjures up images of a cheesemaker practicing his craft in a garage or basement.  Without picking on any brands – though you can be sure the reporter does – the story goes on to contrast this image of hard-crafted limited supply products with some of the mass produced products that bear the label artisan today.

Is the term being used in a misleading way?  Do consumers really believe large multi-national companies are handcrafting products?  Is it just puffing?  The answer, as always, lies with consumer perception.  But for class action wary food companies this may be a claim to keep a close eye on.

The relationship between class actions and arbitration has been a recurrent issue at the Supreme Court in recent years.  The Court has appeared to substantially limit consumers’ ability to bring class actions in court against defendants with which they have an arbitration agreement, as well as to bring class arbitrations when the arbitration agreement does not expressly provide for class claims.

In Stolt-Nielsen S.A. v. AnimalFeeds International Corp., decided in 2010, the Court held that an arbitration panel “exceeds its powers”—a basis to vacate an arbitration award under Section 10 of the Federal Arbitration Act (FAA)—by ordering class arbitration when the parties’ arbitration clause does not reflect an agreement to resolve claims on a classwide basis.  In that case, the parties had agreed that their arbitration clause said nothing at all about class arbitration, and there was no finding by the arbitrators that the law that governed the arbitration clause supplied a “default” rule in the absence of party agreement.  The Court reasoned that arbitration is based on the parties’ consent and that arbitrators cannot require class arbitration in the absence of such consent.

But Stolt-Nielsen left open important questions.  First, what if the parties’ arbitration clause is not silent on class arbitration?  Second, and equally important, who decides whether the parties’ arbitration clause permits class claims?

In Oxford Health Plans LLC v. Sutter, decided June 10, 2013, the Supreme Court addressed the (easier) first question.  In that case, a physician filed a proposed class action in New Jersey state court against Oxford Health Plans, alleging that Oxford violated its contracts and state law by failing to make prompt payments to the plaintiff and the proposed class members.  The court sent the parties to arbitration under a clause in the plaintiff’s contract with Oxford that said:

“No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rules of the American Arbitration Association with one arbitrator.”

The plaintiff continued to assert class claims before the arbitrator, and the parties submitted to the arbitrator the question of whether their arbitration clause permitted class claims.  The arbitrator interpreted the arbitration clause to permit class claims because the clause moved from litigation to arbitration all “possible forms of civil action,” including class actions.

Oxford sought to vacate this decision under the FAA.  The Supreme Court sided with the plaintiff.  Oxford had agreed that the interpretation of the arbitration clause was an issue within the arbitrator’s jurisdiction, and as long as the arbitrator’s decision was based on an interpretation of the contract—and not simply on the arbitrator’s personal view of what ought to be the result (arbitration practitioners call such a decision ex aequo et bono)—a court cannot overturn that decision.

Defendants often think of arbitration as a good way to avoid class actions.  Under Oxford Health, however, a plaintiff can still bring class claims if he or she can convince an arbitrator that the arbitration clause authorizes them.  As the facts in Oxford Health demonstrate, the arbitration clause need not say something as obvious as: “The parties hereby consent to class arbitration.”  Instead, the clause could arguably authorize class arbitration in a number of ways.  It might incorporate rules of an arbitral institution that grant arbitrators the authority to impose class arbitration, or incorporate substantive law that permits class arbitration when the parties’ arbitration agreement is silent, or it might simply be so broad as to be subject to the interpretation that it authorizes class arbitration.

But the effect of Oxford Health may be limited.  As mentioned above, Stolt-Nielsen left open a second important question—does a court or arbitrator decide whether an arbitration clause permits class arbitration?  Oxford Health does not answer this question either because Oxford conceded the issue.  Justice Alito issued a concurrence (which Justice Thomas joined) suggesting that a court, rather than an arbitrator, should decide whether an arbitration clause permits class arbitration, primarily because there is some doubt that absent class members would be bound by the result of the arbitration.

After Oxford Health, plaintiffs to consumer arbitration agreements will likely raise a host of arguments to arbitrators as to why an arbitration clause should be interpreted to permit classwide claims, while defendants will likely—not to mention, should—seek to convince courts that the permissibility of class arbitration is a question that the courts must decide, not the arbitrators.  We should expect to see federal cases in the near future addressing this latter issue.

As we move into summer and our weekend lives transition to more outdoor activities, so do commercials make the shift to more outside scenes.  Ads directed at kids are no exception.  Two recent decisions from CARU remind marketers of the ground rules for kid’s ads showing active outdoor play.  While the CPSC and some plain old good sense have gotten rid of such childhood classics of yore like lawn darts and plastic bottomed swimming pools, the CARU guidelines still admonish to show kids engaged in properly supervised play with appropriate safety equipment.

First, parents or other adult figures should be shown supervising kids when the product or the activities could involve a potential safety risk.  Dynacraft, maker of the Urban Shredder, an electric powered three wheel skateboard that can reach speeds of up to ten miles an hour and creates “sparking action” when the rider turns and puts pressure on a metal part, warned in its product packaging the children must be supervised by an adult to be safe.  The ads depicts boys riding bikes who are magically transported to a large sports arena with parked race cars.  The boys are shown riding the Urban Shredder as spark fly from under the “part skateboard, part motorcycle”.  Four helmeted figures in racing gear are shown in the background.  Dynacraft argued that these figures are adults and show adequate supervision.  CARU said “the adult presence must be meaningful and must suggest that adult supervision is required” and while there were larger people shown, it was ambiguous whether they were engaged in watching over the child.

Second, proper safety equipment must be shown.  In a Razor ProXX Scooter ad, a professional rider was shown mid-air above metal railings while descending a set of steps but wearing no helmet or protective pads. CARU was concerned without proper gear, even if kids appreciated that this was a pro, that kids tend to model older people and are prone to imitation.  And kids might even think it was “cool” to not wear a helmet.  Razor dealt with the problem by agreeing not to show the ad during children’s programming.

So when showing your summer fun ads directed at kids, make sure there is adequate safety and supervision.

The Supreme Court announced on Monday that next term it will consider what is required to establish standing to sue for false advertising under Section 43(a)(1)(B) of the Lanham Act.  Section 43(a), on its face, creates a cause of action for “any person who believes that he or she is or is likely to be damaged.”  The courts, however, have traditionally interpreted this language narrowly to provide standing only for business entities facing commercial or competitive injury as a result of false or misleading advertising.  Although it is now well-settled that consumers do not have standing under Section 43(a), the parameters of commercial or competitive injury have long been a murky matter.  Next fall, the Supreme Court may clarify that issue with a decision that could have an important impact on whether non-competitors and non-competing entities (e.g., trade associations) will have standing to sue for false advertising under federal law.

Last August, in Static Control Components, Inc. v. Lexmark International, Inc., the Sixth Circuit revived a false advertising counterclaim brought by Static Control alleging that Lexmark had falsely informed customers that Static Control had engaged in illegal conduct by selling products that infringed Lexmark’s patent rights.  The Eastern District of Kentucky had previously dismissed Static Control’s counterclaim for lack of Lanham Act standing, finding that Static Control had failed to allege sufficient facts to satisfy the Supreme Court’s multi-factor test for antitrust standing under AGC v. Cal. State Council of Carpenters, which several circuits have adopted in deciding Lanham Act standing.  Citing a prior opinion, the Sixth Circuit ruled that the test for Lanham Act standing in that Circuit is not the same as antitrust standing, but rather involves determining whether the claimant has a “reasonable interest” to be protected and a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.  Applying this “reasonable interest” test, the Sixth Circuit found that Static Control had sufficiently alleged a cognizable interest in its business reputation, which was likely to be harmed by Lexmark’s representations to consumers.

The Sixth Circuit’s Static Control decision leaves a three-way circuit split among the federal appellate courts regarding the proper test for Lanham Act false advertising standing.  The Third, Fifth, Eighth, and Eleventh Circuits apply the Supreme Court’s antitrust standing analysis from AGC, while the Seventh, Ninth, and Tenth Circuits follow a narrower approach by allowing only direct competitors to sue for false advertising under the Lanham Act.  The Second and Sixth Circuits apply the “reasonable interest” approach identified in Static Control, which seems to represent the most permissive standard for Lanham Act standing.

It’s never wise to predict which way the Supreme Court will fall on an issue, so we will not venture a guess in this posting.  However, it is worth noting that the Third Circuit’s Conte Brothers decision applying the antitrust standing analysis to Lanham Act false advertising cases was authored by none other than Justice Samuel Alito during his tenure on that court.  We will have to wait until next term to learn the final word on the Lanham Act standing analysis that has long clouded the case law and confounded litigants.

When the FTC released its revised Green Guides last October, the Agency provided detailed guidance on a number of topics but declined to provide guidance on the claim of “sustainability.”  In doing so, the Commission noted that its job is not to define terms but rather to help advertisers avoid making claims in a manner that is inconsistent with consumer understanding of those claims.  In the case of “sustainable” the Commission found that consumer understanding of the term simply varied too widely for the FTC to provide such guidance.  The Commission cautioned, however, that use of the term was still governed by Section 5 and that advertisers should insure that their use of the term in any specific context was consistent with Section 5 and consumer understanding for the advertiser’s specific use of “sustainable.”

Sorry-charlie-tuna_1Last week the FTC submitted comments to the Marine Stewardship Council on its “Certified Sustainable Seafood” label.  To receive the label, a fishery must meet three criteria.  First, it must manage its practices so that the fish population is maintained and fishing can continue indefinitely.  Second, fishing practices must be conducted so as to minimize the impact on the ecosystem in which the fish live; for example, minimizing the impact on other species that live within the same ecosystem.  Or put even more simply, don’t catch sea turtles in your fishing nets.  Third, the fishery must effectively manage its practices so as to be able to respond to changes in the fish population or the surrounding ecosystem.

The FTC’s comments essentially confirmed its intent to steer clear of providing specific guidance on sustainability claims – advising that the Council should embrace standards that are scientific, objectively applied and that comport with consumer understanding.  Of course, if the FTC is correct and consumers have varied understandings of the term “sustainable” then this creates a potential problem.  As many of you know, under Section 5 a claim can be misleading even if only a relatively small percentage of consumers are misled.  So, as the Commission itself found, any survey of a general sustainability claim seems likely to find a not insignificant number of consumers who take away an interpretation of the claim different than the one intended by the advertiser.  So what’s the solution?  One option is to tell consumers what you intend by the use of “sustainable.”

The revised Green Guides also provide amended guidance on the use of seals and certification.  In essence, seals and certification should make clear the basis for the certification so as to avoid conveying a potentially misleading claim; for example, one of general environmental benefit.  Such information can either accompany the seal or be incorporated into the actual seal name.  Referring consumers to online criteria is generally not permitted unless appropriate qualifying language is used and the criteria themselves are extensive.

In the case of the Marine Stewardship certification, the seal contains the term “sustainable” so the basis for the seal is apparently provided.  But is it?  If consumers, in fact, take away varied interpretations of the use of “sustainable” in the certification, then the actual standards are unlikely to meet the understanding of at least a significant minority of consumers.  So here again, the solution would seem to be to provide consumers with the criteria for the use of the term “sustainable.”

Bottom line: just because the FTC hasn’t provided specific guidance on the use of “sustainable,” don’t assume that the claim can’t land you in troubled waters.

Want to dive deeper into the topic of “sustainability?”  Check out the Advertising Self-Regulatory Council’s June 10 conference in DC on Private Governance and Sustainability Standards.