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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CBD Update: The FDA Commissioner Cannot Ignore the Buzz – But Is Further Deregulation on the Horizon?

With the ink on the president’s signature barely dry, the commissioner of the U.S. Food and Drug Administration (FDA) – Dr. Scott Gottlieb – issued a statement letting everyone know that the agency is aware of the implications of the Agriculture Improvement Act of 2018 (a/k/a the Farm Bill). As we reported last month, CBD derived from hemp may not be “marijuana” any longer, but the laws that the FDA enforces continue to prohibit (at least, in the FDA’s view) the manufacture and distribution of foods and dietary supplements containing CBD. Dr. Gottlieb took this opportunity to reiterate the agency’s position, noting that “it’s unlawful under the [Federal Food, Drug and Cosmetic Act] to introduce food containing CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived.”

The commissioner also indicated, however, that the agency will initiate a process for reexamining current policy, stating:

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The FTC Has New Enforcement Authority in the Fight against Opioid Addiction

The government is serious about opioids. We can see that in the many big, headline-grabbing steps it is taking to confront the problem. We can also see it in a number of small, less well-known steps it has taken. These often unheralded actions are strong evidence that the government is thinking hard, thinking creatively, and thinking aggressively. We will discuss one of those actions here: the unleashing of the FTC into the opioid field.

To review, over a year ago, the Department of Health and Human Services declared the opioid crisis a public health emergency. Since then, numerous federal agencies have been enlisted to step up their efforts to address the emergency. We highlight just a few of the recent statements by the DOJ, the FDA, and the FTC that affirm their commitment to combat opioid drug abuses. This government-wide effort is necessary. As James M. Burnham, the Deputy Assistant Attorney General of the Department of Justice, recently reminded us, opioid drug overdoses claimed the lives of 49,000 Americans in 2017.

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But Wait, There’s More! . . . Litigation: Federal Court Sustains Lanham Act Claims Against Allegedly False “As Seen On TV” Advertising

Many retailers carry products with the phrase “As Seen on TV.” What if a product bearing that phrase, however, had not actually been seen on TV? A recent case in federal court in the Southern District of New York ponders that question.

In an advertising war between copper cookware competitors, plaintiff Emson sued its competitor Masterpan under the Lanham Act challenging claims made for the “The Original Copper Pan” (“OCP”). These claims included Masterpan’s use of the “As Seen On TV” logo; that the OCP was “original;” and that the OCP was “copper-infused,” “made of ultra-tough copper,” and made with “copper construction.” Emson alleged, among other things, that: (a) Masterpan falsely represented the OCP with its “As Seen On TV” label; (b) Masterpan’s “original” advertising deceived the public into believing that the OCP was the first copper pan of its kind; and (c) Masterpan mischaracterized the amount of copper in the OCP. Emson contended that these false claims diverted sales from Emson’s own “Gotham Steel” products, traded off its goodwill, and deceived consumers. Masterpan moved to dismiss Emson’s claims for lack of personal jurisdiction, improper venue, and failure to state a claim.

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New Farm Bill Cracks Open Door to Processing for Legalized Hemp and CBD Oil

Signed into law on December 20, 2018, the 2018 Farm Bill may present a tremendous opportunity for banks and payments companies to provide banking, processing, and other services to the hemp industry. We expect a variety of companies to move swiftly in developing, marketing, and selling products (including CBD oil) that, until yesterday, were controlled substances. This means that banks and payment processors should be prepared for a flood of inquiries from the industry about opening bank, merchant processing, and other financial accounts.

While the Farm Bill “legalizes” hemp, there remain a number of open questions that financial institutions should consider before they start serving the industry. This article provides a brief overview of the Farm Bill’s impact on the legal status of hemp, highlights some of the open questions, and provides suggested best practices for banks and processors seeking to work with the hemp industry.

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Hanging Out to Dry: FTC’s Ongoing Pursuit of Credit Card Laundering has Reached an Apex

The Federal Trade Commission (“FTC”) continues to crack down on companies engaged in credit card laundering. Credit card laundering is the practice of processing credit card transactions for one company through the merchant processing account of another company. Credit card laundering can be used to bypass the monitoring practices and volume thresholds of credit card associations and payment processors. A new complaint and a settlement of a prior case highlight the effort that the FTC is devoting to this area.

On November 14, 2018, the FTC filed a complaint against Apex Capital Group, LLC and others, alleging an international network of corporations and individuals that marketed “free” trial offers to consumers for personal care products and dietary supplements, only to charge consumers the full price for the products. The Defendants also allegedly engaged in credit card laundering. The FTC alleged that the Defendants used dozens of shell companies and straw owners to obtain merchant accounts and process charges through these accounts in furtherance of their scheme.

On December 11, 2018 the FTC announced a settlement of charges against certain defendants in the Money Now Funding (“MNF”) scam regarding their role in laundering transactions for MNF. The FTC previously settled with two other defendants in March 2018. Both settlements led to a ban on acting as payment processors, independent sales organizations, or sales agents, a prohibition on credit card laundering, and a monetary judgment owed to the FTC.

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