FTC Sets Its Sights on Fake Customer Reviews

Since updating its Endorsement Guides in 2015 to keep pace with the meteoric rise of social media and influencers in marketing, the FTC has placed a significant emphasis on the need to disclose material connections between advertisers and endorsers. Through its Guides, informal business guidance, blog posts, warning letters, and multiple enforcement actions, the FTC has deployed virtually all of the tools in its proverbial tool box to combat what it views as deceptive omissions by influencers who promote goods and services that they are compensated in some shape or form to promote. We’ve blogged many times about the nuances of what constitutes a material connection and how to adequately disclose such connection on social media.

This week, the FTC went back to basics. It announced a settlement with a marketer of weight loss capsules for, among other things, hiring a third-party review site to create and post fake reviews of its product on Amazon to boost its ratings, and thus sales. This is the first such enforcement action by the FTC, although the New York AG has brought several such cases challenging similar conduct.

Customer reviews are critical to distinguishing your product and brand in today’s crowded online marketplace. It’s a good practice to monitor reviews to proactively identify strengths and weaknesses with your products and customer service. When you cross the line to controlling the content by manipulating or fabricating customer reviews, however, it is deceptive. If you’re unsure what you can and cannot do with customer reviews, consult with skilled counsel.

Ninth Circuit Affirms FDA Preemption in Tossing Vitamin E Supplement Case

There is no denying that, at times, the express claims made on dietary supplement labels may seem to convey a broader implied claim to the consumer regarding the supplement’s performance benefits. While that may be true, last month the Ninth Circuit confirmed that plaintiffs cannot successfully allege that a lawful “structure/function” claim misleadingly implies that a dietary supplement will treat, cure, or prevent a disease under state law. In so deciding, the court found that Section 403(r)(6) of the Federal Food, Drug, and Cosmetic Act (“FDCA”) expressly permits dietary supplements to make claims that describe the role of a nutrient or dietary ingredient intended to affect the structure or function of the body (i.e., structure/function); and that Section 403A(a)(5) of the FDCA expressly preempts any California law that would differ from the FDCA’s allowance for structure/function claims.

While perhaps not surprising that the court reached this conclusion, a recent Ninth Circuit opinion is worth noting because it is the first time that the court has issued an opinion expressly confirming that lawful structure/function claims will have coverage against California’s strong consumer protection laws. We caution, however, that dietary supplement manufacturers may still face liability under state law if they fail to disclose material information about their products, including its safety profile.

The plaintiff alleged that the defendant’s Vitamin E supplement claims to “support cardiovascular health” and “promote[ ] immune function” were false and misleading in violation of California law because the Vitamin E supplements (1) did not prevent “cardiovascular disease” and (2) might increase the risk of all-cause mortality. The Ninth Circuit disagreed and affirmed the district court’s grant of summary judgment in favor of the defendant.

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Stop the Presses: Third Circuit Limits FTC’s Access to Federal Court for Past Conduct

The Federal Trade Commission suffered a significant blow yesterday. In a decision that many saw coming—bloggers here included—the Third Circuit curtailed authority the FTC has been using for decades to confront allegedly unlawful past conduct. The decision has a direct impact on the ability of the FTC to obtain injunctions against defendants for alleged past misdeeds. In its ruling, the Third Circuit held that the FTC can only go directly into federal court where it can allege a defendant is violating or about to violate the law.

Let us first review the legal landscape. In broad terms, the FTC Act provides the FTC several avenues to address consumer harm. The FTC could bring an administrative action to obtain a cease and desist order against a defendant. In addition, after all judicial review of the order is complete, the Commission may file an action for consumer redress under Section 19 of the FTC Act (15 U.S.C. § 57b) if the FTC can allege that the conduct in question was such that “a reasonable man would have known under the circumstances was dishonest or fraudulent.” Claims for redress under Section 19, however, are subject to a three-year statute of limitations. As one can imagine, that administrative process and the subsequent court proceeding are time consuming. To avoid the statute of limitations and the cumbersome two-step process, the FTC has, in recent decades, overwhelmingly chosen a different option. It has used its authority expansively under Section 13(b) of the FTC Act (15 U.S.C. § 53(b)) to go straight into federal court and seek both injunctive and equitable monetary relief.

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Who Made the Call? Applying the Fundamentals of Pleadings to TCPA Actions

Twombly and Iqbal—two names that invoke fond memories of the first year of law school for the (much) younger attorneys—have defined the bar that each plaintiff must meet to survive a Rule 12(b)(6) motion to dismiss. Walk into any first-year civil procedure class and you’ll hear the students muttering the following like a nursery rhyme or a page from a Dr. Seuss book, “Twombly said ‘enough facts to state a claim to relief that is plausible on its face’ and Iqbal followed ‘[a] pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do.'” The lesson the students are supposed to take away is that a complaint must connect the dots between a defendant and the claim.

In a recent ruling issued by the Southern District of California, Ewing v. Encor Solar, LLC, No. 18-2247, 2019 WL 277386 (S.D. Cal. Jan. 22, 2019), the court confirmed that this fundamental requirement applies, unsurprisingly, to Telephone Consumer Protection Act (“TCPA”) claims against multiple defendants. In particular, the court dismissed the TCPA claim because the plaintiff failed to identify who actually called him.

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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.

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