Updates in FTC and California’s Continuing Enforcement of Continuity Programs

Thought that the FTC and California planned to cool off on enforcing trial and subscription programs? Think again. The FTC and California continue to bring these actions with alarming regularity.

For those of you who haven’t been tracking these issues, last year California’s Automatic Renewal Law was amended to tighten the restrictions on continuity programs. The amendments increased restrictions on companies providing trial or discounted introductory programs, and required companies to provide an “exclusively online” cancellation mechanism for consumers who originally accepted the service agreement online.

In addition, both the FTC and the California Autorenewal Task Force (a team of district attorneys who enforce the statute) have brought multiple challenges against companies offering continuity programs. We wrote a few weeks ago about the FTC’s settlement with Urthbox, which included charges challenging how that company’s free trial and subscription offerings were disclosed.

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Wait – So There Is No “Viagra for the Brain?” FTC Yet Again Bars Dietary Supplement Sellers from Making Unsupported Cognitive Claims

Consumers over 50 are on an endless quest for things that make us feel, look, or perform like younger versions of ourselves. Marketers aware of how aging demographics are tuned into this quest. The FTC has been especially vigilant in policing claims that dietary supplements, especially in the cognitive and memory space, can turn back the clock (for additional reading on the FTC’s history with unsubstantiated cognitive claims, check out our previous blog posts on Prevagen, 5-Hour ENERGY®, Brain Training, Lumosity, Word Smart, and Your Baby Can Read). Last week, the FTC reached a $25 million settlement with four individuals and their companies that sold supplements touted as “Viagra for the Brain” and promising to increase users’ cognitive abilities (see the settlement orders here and here). The case provides a guide of what not to do in selling dietary supplements.

In its complaint, the FTC argued that the defendants falsely claimed that their supplements Geniux, Xcel, EVO, and Ion-Z could enhance users’ focus by as much as 300 percent; concentration, memory recall, and IQ by as much as 100 percent; and brainpower by as much as 89.2 percent. The advertisements claimed that scientists were declaring the defendants’ “Smart Pill” to be “Viagra for the Brain,” and that the supplements should be “taken as directed for extreme IQ effects.” The supplements were sold for between $47 and $57 per bottle.

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To Be an Ad or Not to Be an Ad: That is the Question

You want to start taking supplements, so you turn to a guide containing consumer reviews. Is the guide just a collection of advertisements? Last month, the Southern District of California again confronted this question, and also took into consideration whether the reviews should be afforded First Amendment protection. The court reiterated its prior finding that the Lanham Act does not apply to a nutritional supplement guide that faced a false advertising challenge.

In the fifth edition of the NutriSearch Comparative Guide to Nutritional Supplements (the “Guide”), NutriSearch recognized four companies—but not Ariix—with the Gold Medal of Achievement, even though NutriSearch allegedly acknowledged Ariix met the standards for the distinction. For its part, NutriSearch explained that it was reworking its awards recognition program for the sixth edition of the Guide, and that the fifth edition Gold Medal winners were merely prior winners who were grandfathered in. Ariix filed suit against NutriSearch and the Guide’s author, Lyle MacWilliam, claiming that the failure to award the Gold Medal amounted to a false representation that Ariix or its products are not as good as its main competitor, Usana, or Usana’s products. Ariix also alleged that the Guide claims to be objective and neutral, but is actually a shill for Usana, because of a previously undisclosed business relationship between MacWilliam and Usana.

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FTC’s Snack Service Settlement Reminds DTC Companies Not to Incentivize Reviews

Positive online reviews have become essential for any business marketing goods or services over the internet, especially for trendy services like food delivery and custom health product sales. But the FTC’s newly-announced settlement with startup healthy snack service UrthBox reminds marketers that online praise must be freely given, not bought—even if the compensation offered isn’t monetary.

UrthBox, Inc., a San Francisco company offering direct-to-consumer snack deliveries on a subscription model, drew the FTC’s ire by maintaining an incentive program that offered free snack boxes to consumers who posted positive reviews on the BBB’s website. According to the FTC’s complaint, the plan was simple: when a consumer reached out to UrthBox, customer service representatives would offer to send free products to the consumer in exchange for a screenshot of a positive review. The program began with the customer service department at UrthBox, where representatives were paid bonuses based on the number of consumer complaints they were able to turn into positive online reviews. The impact was significant: where UrthBox’s BBB profile had only nine reviews (all negative) in 2016, by the end of the next year, the company boasted 695 reviews, 88% of them positive.

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Fraudsters and Facilitators, Privacy and Penalties, Shire and Selection: The FTC’s Plans for Consumer Protection

Winding down the 67th Antitrust Law Spring Meeting last week, Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection (the “Bureau”), provided an overview of the FTC’s consumer protection priorities. Director Smith reiterated that Chairman Simons’ focus on law enforcement applies across the Bureau’s five major areas: marketing, finance, advertising, privacy, and enforcement. In deciding who to sue, the FTC plans to look beyond just alleged “fraudsters and scammers,” and will also focus enforcement on the individuals who promote frauds. Director Smith gave as an example how the FTC recently went after an individual who created a robocall software that scammers used, even when that software was also being used for legitimate robocalls. He also noted the FTC went after a Belizean bank that was involved with the Sanctuary Belize scam. In short, Director Smith made it clear that the FTC will go after those the FTC believes are perpetrating fraud and those who facilitate it. Not surprisingly, Smith did not address that the FTC lacks aiding and abetting authority except under the Telemarketing Sales Rule.

Director Smith also addressed recent hearings on data security and consumer protection. He expressed his view that there exists a market failure regarding companies’ investments in data security due to a lack of incentive to invest. According to Smith, giving the FTC the authority to impose civil penalties may provide the incentive companies need to rectify this failure. Director Smith also noted that if the FTC had the authority to promulgate new regulations requiring companies to disclose more on their data use and security, consumers would be able to comparison shop based on those factors.

Next, Director Smith addressed the Shire case. Director Smith and Director Hoffman—of the Bureau of Competition—explained that the outcome in Shire is inconsistent with other courts’ interpretations of the FTC Act. Although the Shire case will not affect the types of cases the FTC brings, they acknowledged it will cause the FTC to bring these cases more quickly to avoid the issue of likelihood of reoccurrence when the conduct happened years prior. According to Smith, the Shire decision may also affect forum selection, and cause the FTC to bring more cases administratively when the conduct has ceased.

Whether the FTC gets the enhanced authority it plans to seek from Congress and how the Shire case and its progeny play out in the courts remains to be seen.

Let’s Get This “Local” Bread!

Bimbo Bakeries and U.S. Bakery recently found out that consumer confusion, like politics, is local, and that “local” means what the local consumer says it means. Let’s unbraid this loaf.

In Bimbo Bakeries USA, Inc. v. Sycamore, No. 2:13-CV-00749, 2019 WL 1058234 (D. Utah Mar. 5, 2019), the jury originally awarded Bimbo $8,027,720 in damages on its false advertising claim against U.S. Bakery, which tried multiple times to convince the court that what makes bread “local” is really a matter of the seller’s opinion, or at least that claiming bread is “local” is mere puffery. According to U.S. Bakery, “local” is a geographical term, but not a geographically descriptive term entitled to Lanham Act protection, because “local” is not a specified location.

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FTC Hints It’s Feeling the Buzz

Last September, the National Advertising Division (NAD) published a decision assessing whether the editorial content surrounding an affiliate link constituted “national advertising” requiring substantiation. At issue were two statements in a BuzzFeed “shopping guide,” in which the author tested and recommended various skincare products. The NAD reviewed BuzzFeed’s internal procedures with respect to the editorial content and the affiliate link, and determined that the content did not constitute “national advertising” and was therefore outside the NAD’s jurisdiction.

But how would the FTC treat editorial content surrounding an affiliate link? The NAD acknowledged that the “FTC . . . does not directly address whether the act of placing an affiliate link next to content about the related product renders the content ‘advertising’ that requires substantiation.” The FTC recently ended its silence. In her remarks at the NAD West Coast Conference earlier this month, Mary K. Engle, the associate director of the FTC’s Division of Advertising Practices, indicated that the FTC would follow the same analysis the NAD conducted to determine whether “advertising” includes the editorial content surrounding an affiliate link.

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FTC Chairman Simons Addresses 2019 ANA Conference

FTC Chairman Joseph Simons used his opening keynote address at the 2019 ANA Advertising Law & Public Policy Conference to put his audience on notice: the FTC has its eye on national advertisers.  Simons made it clear that even during a Republican administration, under his leadership, the Bureau of Consumer Protection will no longer be the forgotten half of the agency.  Simons characterized the FTC as the “primary cops on the beat,” the foot soldiers charged with enforcing the “level playing field” on which companies compete, “based on the merits and unique features of their products and services.”

Simons made it clear that consumer protection is not limited to policing “worthless or harmful” products.  Instead, he reminded the audience that the FTC has, does, and will continue to bring enforcement actions against bona fide products if they make claims that overstep or play fast and loose with the truth.  Citing a dozen high-profile examples, he emphasized that the Commission will take these cases into federal court where necessary.  National advertisers can expect no quarter for being white hat providers of “legitimate” goods and services if they employ unscrupulous methods of advertising.

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Definitely not “Winning”: Scammers Pay Millions to FTC and Missouri Attorney General for Running Deceptive Prize Scheme

In February 2018, the FTC teamed up with the Missouri Attorney General’s office in filing a complaint against a prize promotions company and others that allegedly operated a large-scale deceptive prize scam targeting the elderly. A little more than a year later, the FTC and the Missouri AG’s office announced that they reached a settlement to the tune of $30 million. The settlement is comprised of $21 million in cash, and the remainder will be made up by liquidating assets owned by the individual defendants, such as luxury vacation homes, a yacht, a Bentley automobile, and other personal property. The full judgment, which will become due immediately if the defendants are found to have misrepresented their financial condition, amounts to $114.7 million.

According to the complaint, the defendants allegedly sent tens of millions of deceptive personalized mailers to consumers around the world. One category of mailer falsely told recipients they had won a substantial cash prize, and a subset of this group were merely a means of disguising newsletter subscription solicitations. Another type of mailer claimed the recipient could win a substantial cash prize by answering simple arithmetic questions and paying a registration fee. These mailers failed to disclose, though, that they were the first in a series of multiple rounds in a larger “game of skill”—in other words, a contest—and that the recipient would have to pay additional fees to advance to the next round. The contest culminated in a final, complex mathematical puzzle that few people, if any, can solve. Consumers allegedly lost more than $110 million to the defendants’ scheme.

In light of the Justice Department’s recently announced “largest coordinated sweep of elder fraud cases in history,” we expect the FTC to take a closer look at consumer complaints from the elderly. As a particularly vulnerable group of consumers, it is especially important that advertising aimed at the elderly contain clear and conspicuous language disclosing all material terms, particularly any required purchases. Moreover, while some potential prize promotion sponsors view games of skill as less heavily regulated than the more common sweepstakes or games of chance, this case shows that this is not the case. It’s important to understand that many federal and state laws make no distinction between the two when it comes to the material disclosures that are required in advertising and the rules, and moreover, there are specific laws that regulate particular kinds of skill promotions. For example, California has a law dictating specific disclosures when conducting multi-level puzzle promotions, and the federal Deceptive Mail Prevention and Enforcement Act requires the publication of the full rules in any mailer for a skill or chance promotion that includes an entry form (among other requirements). Should you have any questions about best practices for running your promotions, the Venable team is here to help.

Guest Blog: Amazon’s New “Project Zero” – A Way for Brand Owners to Curb Counterfeits

Amazon has just announced Project Zero to potentially assist brand owners in combatting counterfeit goods by removing products likely to be fake from the online retailer’s platform. Project Zero would allow brand owners to designate product listings for removal, instead of undergoing Amazon’s prior reporting and removal process, which required brand owners to report counterfeit products to an internal Amazon team for investigation prior to removal. So far, Amazon has tested the Project Zero pilot program with several brands over the past few months, but will now open up Project Zero to additional companies through an invitation process. Amazon hopes that eventually all brand owners will be able to join the program.

Using Project Zero, brands provide trademarks, logos, etc., and Amazon scans listings daily, looking for suspected counterfeits. Brands can log into an online portal to search for keywords or images of their products on Amazon, and click listings they believe to be infringing. Amazon then removes either the item at issue, or the seller automatically. The ability to remove counterfeit listings is free, but brand owners can also utilize a Project Zero tool that generates a unique serialized barcode for each product unit, which the brand owner can print onto its product packaging or attach to products via a sticker. Brand owners and Amazon can then use those codes to ensure product authenticity when they enter an Amazon warehouse. The product codes cost between roughly 1 and 5 cents each, depending upon the volume at issue. While participation in Project Zero is currently by invitation only, Amazon has a waitlist for participation. In order to participate, brand owners have to have registered trademarks and be enrolled in Amazon’s brand registry.

Accordingly, if you are a brand owner, or represent a brand owner, now would be a good time to shore up your company’s registered trademark protection. Likewise, if your brand is fortunate enough to participate in the Project Zero program, the brand should not abuse its discretion in removing suspect product listings, as brand owners must “maintain a high bar for accuracy in order to maintain their Project Zero privileges.” Amazon Project Zero training is also required for users participating in the anti-counterfeiting program.

For more information, please contact Justin Pierce or Marci Ballard.

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