FTC on the Path to Proposed Amendments to the Endorsement Guides

On May 19, 2022, the Federal Trade Commission (FTC) unanimously voted to publish for public comment in the Federal Register proposed changes to the Guides Concerning the Use of Endorsements and Testimonials in Advertising (the Guides). The proposal makes a number of changes to the Guides, which were first enacted in 1980 and later updated in 2009. The main areas of proposed amendments address (1) changes to definitions, (2) fake and suppressed consumer reviews, (3) advertising directly to children, and (4) liability of advertisers, endorsers, and intermediaries.

Changes to definitions and guidance about material connections
First, the FTC has proposed changes to some of the definitions in the Guides, including expanding the definition of “endorser” to cover anyone that could be or appears to be an individual, group or institution, in order to capture virtual influencers, such as computer-generated advertisers, and fake endorsements or reviews. Additionally, the proposed revised definition of “endorser” would clarify that marketing and promotional messaging can be considered an endorsement, as can tags in social media posts. The FTC would also add a definition of “clear and conspicuous” as something that is “difficult to miss (i.e., easily noticeable) and easily understandable by ordinary consumers.” In recent years, there has been confusion over what “clear and conspicuous” truly means in advertising. Importantly, the definition notes that for a communication made through visual and audio means, a disclosure presented simultaneously in both visual and audible portions of the communication is more likely to be clear and conspicuous. The proposed definition also notes that when an endorsement targets a specific audience, such as older adults, its effectiveness will be evaluated from the perspective of members of that group.  The proposed revisions to the Guides also provide examples of what is considered a material connection and states that material connections require disclosure regardless of whether an advertiser requires an endorsement in return.

Fake and suppressed consumer reviews
In light of recent cases, where online sellers suppressed or did not publish product reviews based upon certain star ratings or negative reviews, the FTC proposes a new section of the Guides regarding consumer review transparency. This includes guidance concerning buying fake reviews, threatening customers with negative reviews, deleting negative reviews, and disclosing material connections when providing reviews.

Advertising to children
The FTC has paid particular attention to highlighting children-directed advertising and has stated that this is of special concern to the Commission. In particular, the FTC has proposed an additional section to the Guides to address children targeted advertising, noting that “Endorsements in advertisements addressed to children may be of special concern because of the character of the audience. Practices which would not ordinarily be questioned in advertisements addressed to adults might be questioned in such cases.” The FTC acknowledged that it would benefit from more evidence to develop specific guidance in this area, but also indicated that there is ample basis to recognize that children may react differently than adults to endorsements in advertising or to related disclosures. As such, the FTC will be holding a virtual event on October 19, 2022. The objective of the event is to gather research and expert opinion on: (a) children’s capacities at different ages and developmental stages to recognize and understand advertising content and distinguish it from other content; (b) the need for and efficacy of disclosures as a solution to the problem facing children of different ages; and (c) if disclosures can be efficacious, the special challenges presented by advertising to children, and the most effective format, wording, and placement for disclosures.

Liability of advertisers, endorsers, and intermediaries
Finally, the FTC provided more guidance on who may be subject to liability for misleading and unsubstantiated statements made through endorsers. The proposed revisions to the Guides provide examples of how advertisers, endorsers, and intermediaries (such as advertising agencies) may be liable depending on a variety of situations, including for failing to disclose material connections and disseminating what one knows or should have known was a deceptive endorsement. Social media platforms may also be liable for representations concerning built-in disclosure tools, as some tools are inadequate for making clear and conspicuous disclosures. The FTC stated that this would encourage social media platforms to evaluate their tools to avoid liability.

Takeaway

The proposed revisions to the Guides are an outcome of the FTC’s February 2020 request for public comment. The revisions reflect the FTC’s recent enforcement activity as well as the realities of the increased use by advertisers of social media, influencers, and consumer reviews. Although the Guides are not law, they provide insight into the FTC’s interpretation and application of section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices. Advertisers, advertising agencies, endorsers, and platforms that disseminate and monetize endorsements should review the proposed revisions and their own policies and practices to ensure they align with the FTC’s proposed guidance. In addition, those who advertise products directed to children should attend the FTC’s virtual event on October 19. 

New Digital accessibility guidance: what brands need to know

The Department of Justice recently released new guidance describing how state and local governments and businesses open to the public can make sure that their websites are accessible to people with disabilities. The guidance offers general information and also includes specific recommendations to improve the user experience.

On March 18, the Department of Justice (DOJ) released “Guidance on Web Accessibility and the ADA” (the Guidance), describing how “state and local governments and businesses open to the public can make sure that their websites are accessible to people with disabilities as required by the Americans with Disabilities Act (ADA).” The Guidance does not have the force of rulemaking, but it affirms that ensuring web accessibility for people with disabilities is a priority for the DOJ.

The Guidance does not prescribe a specific set of standards with which businesses must comply, but it notes that the Web Content Accessibility Guidelines (WCAG) and the Section 508 Standards (which the federal government uses for its own websites) can be helpful. The Guidance also offers examples of what businesses should do to make websites accessible. These include:

  • Color contrast in text. Sufficient color contrast between the text and the background allows people with limited vision or color blindness to read text that uses color.
  • Text cues when using color in text. When using text color to provide information (such as red text to indicate required form fields), including text cues is important for people who cannot perceive the color. For example, include the word “required” in addition to red text for required form fields.
  • Text alternatives (“alt text”) in images. Text alternatives convey the purpose of an image, including pictures, illustrations, charts, etc. Text alternatives are used by people who do not see the image, such as people who are blind and use screen readers to hear the alt text read out loud. To be useful, the text should be short and descriptive.
  • Video captions. Videos can be made accessible by including synchronized captions that are accurate and identify any speakers in the video.
  • Online forms. Labels, keyboard access, and clear instructions are important for forms to be accessible. Labels allow people who are blind and using screen readers to understand what to do with each form field, such as by explaining what information goes in each box of a job application form. It is also important to make sure that people who are using screen readers are automatically informed when they enter a form field incorrectly. This includes clearly identifying what the error is and how to resolve it (such as an automatic alert telling the user that a date was entered in the wrong format).
  • Text size and zoom capability. People with vision disabilities may need to be able to use a browser’s zoom capabilities to increase the size of the font so they can see things more clearly.
  • Headings. When sections of a website are separated by visual headings, building those headings into the website’s layout when designing the page allows people who are blind to use them to navigate and understand the layout of the page.
  • Keyboard and mouse navigation. Keyboard access means users with disabilities can navigate web content using keystrokes, rather than a mouse.
  • Checking for accessibility. Automated accessibility checkers and overlays that identify or fix problems with your website can be helpful tools, but like other automated tools such as spelling or grammar checkers, they need to be used carefully. A “clean” report does not necessarily mean everything is accessible. Also, a report that includes a few errors does not necessarily mean there are accessibility barriers. Pairing a manual check of a website with the use of automated checkers can give you a better sense of the accessibility of your website.
  • Reporting accessibility issues. Websites that provide a way for the public to report accessibility problems allow website owners to fix accessibility issues.

As noted in the Guidance, the list above is not complete. Also, a business’s accessibility priorities may depend on its industry and customer base. For example, an online retailer may prioritize creating accessible order forms and product image descriptions, while a provider of online courses may initially focus on ensuring that videos are properly captioned and in some cases described for the benefit of people who are blind.

Reed Smith can help brands understand their compliance obligations and assess what the Guidance means for their digital properties.

CCPA’s “right to know” includes inferences drawn from personal information, according to AG Bonta

On March 10, 2022, the California Office of Attorney General Rob Bonta (OAG) issued an opinion (the Opinion) interpreting the California Consumer Privacy Act (CCPA) and concluding that consumers have a right to know “internally generated inferences” drawn from the consumer when they are derived from personal information and are used to create a profile about that consumer, regardless of whether the inferences are based on personal information obtained from the consumer, are generated internally by the business (e.g., through proprietary process), or are obtained from another source. However, the Opinion also clarified that the CCPA does not require businesses to disclose any trade secrets related to the development of such inferences when responding to consumer requests.

Background

The CCPA is a comprehensive state privacy law that provides California consumers with a number of rights related to their personal information, including the right to know what specific pieces of personal information covered businesses hold about them. It is the first law of its kind in the United States, and several states, including Colorado, Virginia, and, most recently, Utah, have since followed in California’s footsteps in enacting comprehensive state privacy laws.

The CCPA applies to businesses that collect information from consumers in California that either: have gross revenues exceeding $25 million a year; buy, receive, or share for commercial purposes the information of 50,000 or more California residents, households, or devices a year; or derive 50 percent or more of their annual revenue from selling California residents’ personal information.

A business subject to the CCPA must give consumers control over their personal information. “Personal information” is broadly defined as “information that identifies, relates to, describes, is reasonably capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.” Cal. Civ. Code section 1798.140(o)(1). This is important to note, as this broad definition accounts for information linkable to an individual irrespective of whether it is collected from devices, automobiles, home appliances, and via cookies and pixels on websites or other common means, subject to a few exceptions under the law.

What “right to know” does the consumer have?

The “right to know” includes two components. First, at the time of collection, a business must inform the consumer about what personal information it collects (and for what purpose). This is typically done via a privacy policy. Second, the business must provide the consumer with the ability to access the personal information that a business has collected about them, which is referred to as a “data subject access request” (DSAR). Given this, it is important that businesses have an understanding of the data that likely constitutes personal information as a business will generally be required to provide this data to the consumer in the event the consumer submits a DSAR.

Within the definition of “personal information,” the CCPA explicitly lists examples of what constitutes personal information including personal identifiers (such as real names, aliases, online identifiers, email addresses, social security numbers), biometric information (such as fingerprints and voiceprints), and Internet activity information (such as browsing history and search history).

The definition of “personal information” also includes “inferences” drawn from the pieces of information listed in the CCPA when used to “create a profile about a consumer reflecting the consumer’s preferences, characteristics, psychological trends, predispositions, behavior, attitudes, intelligence, abilities, and aptitudes.” Notably, the Opinion sets out that “inferences” are subject to access requests, irrespective of whether the inferences were generated from public or private sources.

What are inferences?

The CCPA defines an inference as “the derivation of information, data, assumptions, or conclusions from facts, evidence, or another source of information or data.” As summarized in the Opinion, “[a]n inference is essentially a characteristic deduced about a consumer (such as ‘married,’ ‘homeowner,’ ‘online shopper,’ or ‘likely voter’) that is based on other information a business has collected.” Unlike other forms of personal information, such as a consumer’s name or address, an internally generated inference is not collected from or known by the consumer. Rather, an internally generated inference is information created by the business about the consumer, and, according to the OAG, “[i]n almost every case, the source as well as the substance of these inferences is invisible to consumers,” which can arguably have a significant impact on consumer engagement, offers, and messaging.

The OAG recognized that businesses may independently “create inferences using their own proprietary methods,” for example, through proprietary algorithms or technology. And although the business may be required to disclose the inference, the Opinion provides that the “CCPA does not require businesses to disclose their trade secrets in response to consumers’ requests for information.” Businesses should exercise caution in denying verified DSARs on this basis however, and should generally provide a more meaningful and understandable reason for the denial rather than a blanket assertion of “trade secret.”

The Opinion states that when a business receives a verified DSAR, the business must disclose the internally generated inferences when two conditions are met: (1) the inferences are derived from the consumer’s personal information and (2) the inferences are used by the business to create a profile about the consumer. On the first condition, the Opinion clarifies that it does not matter how the business generates the inference or the source of the information the inference is based on. Specifically, the Opinion states that “it does not matter whether the business gathered the information from the consumer, found the information in public repositories, bought the information from a broker, inferred the information through some proprietary process of the business’s own invention, or any combination thereof.” The inference is still considered personal information that may be subject to disclosure in response to a verified DSAR.

Notably, the Opinion emphasized that the inference must be disclosed in response to a DSAR “regardless of whether the information was based upon public information.” The OAG highlighted that even if the public information does not have to be disclosed as part of the access request, the inference itself, once drawn, becomes personal information and must be disclosed. For example, if an inference is drawn as a result of a consumer’s publicly available employment status, the inference itself would have to be included in the response to the verifiable access request even if the employment status does not need to be disclosed.

On the second condition, the Opinion explains that the fact that the inference must be used to “create a profile” about a consumer is meant to narrow the set of inferences that need to be disclosed. The intent for this limitation is to rule out situations where a “business is using inferences for reasons other than predicting, targeting, or affecting consumer behavior.” To clarify, the OAG gives an example of an inference that may not be required to be disclosed: when a business combines information obtained from a consumer with online postal information to obtain a zip code to allow for delivery and then deletes the zip code and does not use it to “identify or predict the characteristics of a consumer.”

Thus, businesses that draw inferences from personal information should take the additional step to determine whether they are using the inference to create a profile to “predict, target, or affect consumer behavior.” The OAG takes the position that consumers have a right to know if a business is making these deductions and creating profiles about a consumer because if so, such inferences are subject to the access request under the law.

The Opinion provides some helpful clarity as to one of the many ambiguous layers of the CCPA that was subject to differing interpretations. It also demonstrates the OAG’s intention to provide consumers with more information and control with respect to what information is collected and how it is used with a particular focus on personal information that is used for profiling and marketing.

Key takeaways

  • Industry effects

Several industries, such as advertisers and data brokers, rely on internally generated inferences and profiling as a part of their business. Businesses in these industries should ensure that their compliance programs treat inferences as personal information, including granting access to inferences when responding to DSARs pursuant to the CCPA.

  • Potential enforcement priority

The Opinion goes into detail about potential harms the OAG believes internally generated inferences can cause, and the OAG refers to internally generated inferences as being “at the heart of the problems that the CCPA seeks to address.” The OAG’s relatively strong language could suggest that compliance around internally generated inferences will be an enforcement priority for the OAG going forward.

“Influencer” Marketing and the Potential Rise of Celebrity Liability

Influencers tell us to “click on the link” in their bios, “shop” via their platforms and watch their videos where they summarize the good and the bad of whatever product or service they are marketing.  We click, we shop and we listen to these influencers.  A question that often arises for those in the influencer business is whether they can be liable for product claims or statements.  The short answer there is “yes” – the influencer can be liable for their own claims, and so it is important that they have a solid contract in place with any brand to help insulate them from liability.  A similar question was recently raised in Petunia Products, Inc. v. Rodan and Fields, LLC et al., where Petunia Products, Inc. (“Petunia”) challenges influencer Molly Sims, as well as the owner of the product she was touting, Rodan & Fields, LLC (“R+F”), for trademark infringement due to posts that Ms. Sims made about the product she was asked to review by Rodan & Fields, LLC.  Simply put: Petunia claims that Ms. Sims was infringing its trademark by posting about R+F’s product.

Background

Petunia owns the “BROW BOOST” trademark responsible for its “Billion Dollar Brows” eyebrow product.  In addition to any common law rights that Petunia claims to own in the phrase “BROW BOOST,” Petunia owns a federal trademark at U.S. Trademark Reg. No. 3100739, covering eyebrow primers and conditioners.

Rodan & Fields is a company that specializes in skincare and lash products.  The company retained Molly Sims to draft a sponsored post on her blog promoting the company’s new “Brow Defining Boost” eyebrow product.  In the blog post, Ms. Sims provides links to the R+F website and gives what she argues is a “simple product review” where she lets readers know how she uses the product in question and provides before and after photos.

In April 2021, Petunia sued R+F and Ms. Sims for trademark infringement and related claims based on its rights in “BROW BOOST.”  Petunia alleges that Ms. Sims and R+F unlawfully used Petunia’s registered “BROW BOOST” trademark in online advertising to sell competing cosmetic products, which have and continue to harm the goodwill and reputation of Petunia’s registered mark.  Generally, the complaint alleges (1) direct infringement, (2) contributory infringement, (3) false advertising, and (4) unlawful and unfair business practices against Ms. Sims and R+F.

Ms. Sims’ Motion to Dismiss

Ms. Sims moved to dismiss herself from the lawsuit altogether rather than answering Complaint as R+F did.  She reduced her conduct to one singular blog post about the R+F product where she clearly identified R+F as the seller and contended that the Complaint did not sufficiently allege claims against her.  Ms. Sims argued that the lawsuit against her as a third-party influencer was a misdirected claim that should be lodged solely against R+F.  Ms. Sims further argued that because “Petunia does not allege that [she] sold or offered the product for sale,” and conflates R+F’s alleged actions with those allegedly made by her, the claims against her should be dismissed.

Petunia’s Opposition

In opposition, Petunia reiterated its primary allegations against R+F and maintained that R+F’s contractual sponsorship with Ms. Sims to use her reputation, authority, knowledge, reach, and relationship with her social media audience to “influence,” infringed upon Petunia’s mark.  Petunia further argued that it sufficiently alleged a direct infringement claim against Ms. Sims because it alleged that Ms. Sims advertised the product in violation of the Lanham Act and provided a link to consumers to purchase the product.  Petunia further asserted that it sufficiently alleged a contributory infringement claim against Ms. Sims because she induced her followers to share a link where the product in question was offered for sale.

The Court’s Decision on Ms. Sims’ Motion to Dismiss

The court dismissed the contributory infringement and false advertising claims against Ms. Sims but it denied the motion to dismiss with respect to the direct infringement and unfair business practices claims.  The contributory infringement and false advertising claims were dismissed because Petunia failed to allege that Ms. Sims had knowledge of either the alleged infringement or the alleged misleading statements.

As it relates to the direct infringement and unfair business practices claims, however, the court found otherwise.  The court reasoned that Petunia sufficiently alleged that Ms. Sims used its trademark in commerce and that the use was likely to confuse customers as to the source of the product.  Although Ms. Sims’ blog post reviewed the R+F product, the court found that because Petunia alleged that Ms. Sims authored the sponsored blog post in question and provided a link to R+F’s website where readers could “SHOP THE [ALLEGED INFRINGING] PRODUCT,” Ms. Sims’ use was in connection with the advertisement of the product that “crossed from protected consumer commentary to commercial use.”  Furthermore, the court reasoned that Petunia sufficiently plead likelihood of confusion, as R+F’s “Brow Defining Boost” was quite similar to Petunia’s trademarked, “Brow Boost.”

Ms. Sims’ Defenses

Ms. Sims has since filed an answer to the Complaint.  In her answer, Ms. Sims relevantly asserts the following affirmative defenses: (1) Ms. Sims’ nominal and fair use of “Brow Defining Boost” merely referred to the product as R+F had produced it to Ms. Sims for review; (2) because Petunia has previously permitted other third party uses that are more similar to its mark than “Brow Defining Boost,” it is estopped from asserting that Ms. Sims’ use of “Brow Defining Boost” is infringing; and (3) to the extent Ms. Sims is held to have used any trademark in commerce by way of her testimonial, she lacked any control or involvement in the alleged infringement.

Takeaway:  It is notable that the court permitted Petunia’s trademark infringement claim to go forward as to both R+F and Ms. Sims.  While many influencers routinely write blogs and other social media posts marketing various products, the fact that these are posts commissioned by third parties does not insulate the influencer from potential liability.  In addition, brands should also continue to ensure they are clearing and considering any third party rights when promoting their products, even if the promotion is conducted by a third party.  It is in the best interest of brands and influencers to have contracts in place to minimize the risk associated with advertising practices of either party.

While the merits of this case have yet to be decided, the court’s decision here signals that third-party influencers may be more liable for their role in marketing products than the courts and product owners historically gave them credit.  This case is one to continue to watch.

Renew Without Ado: How to Avoid Automatic Renewal Subscription Violations

“30-day free trial,” “Cancel anytime,” “Risk-free” – if you’ve read or heard these terms associated with a subscription-based program, you may want to ensure that you are up to speed with the regulations governing automatic renewals.  Programs with automatic renewals have long been a source of regulatory scrutiny, as they can trigger consumer complaints when cancellation is challenging or if the terms of such programs are unclear.  Today, automatic renewals are back in the press as the subscription-based weight-loss app Noom, Inc. (Noom) has agreed to pay $62 million in a preliminary settlement to resolve claims that it offered a deceptive automatic renewal scheme to about two million consumers across the United States.  In addition, several states are currently considering revising their laws or have revised their laws to clarify and broaden the requirements for these programs.  Given this, any company offering such a program should consider a refresh of the terms to ensure it remains in compliance.  Otherwise, these programs risk class action lawsuits – as faced by Noom.

Noom settlement

The Noom case started at the height of the pandemic, in May 2020, when a group of consumers filed a class action suit against Noom in the U.S. District Court for the Southern District of New York.  The plaintiffs alleged that the company used a deceptive automatic renewal scheme that lured users into expensive subscriptions that were hard to cancel.   Specifically, the complaint argued that users who initially signed up for a “risk-free” or low-cost trial, and subsequently tried to cancel their subscription before the expiration of the trial period, were unable to do so because of Noom’s complicated cancellation policy, which required users to cancel through a virtual coach, rather than directly by other means such as the app, email, or website, which meant that their subscription converted to an auto-recurring membership.  Notably, plaintiffs alleged that they were unable to stop the trial membership from converting to an automatically renewing subscription unless they had a smartphone; and, when they were unable to cancel, the assessed charge was an advance payment for “multiple months of membership.”  Plaintiffs alleged that this “difficult by design” subscription practice forced users to pay nonrefundable renewal payments.

If the $62 million preliminary settlement is approved by the court, Noom would pay $56 million in cash and offer $6 million in subscription credits.  The plaintiffs claim that “the cash portion of this settlement is the largest-ever cash recovery for consumers in an autorenewal case, far exceeding payments in past private and public cases.”  Noom also agreed to make changes to its automatic renewal practices.  Such changes include providing clear disclosures about the company’s automatic renewals, email reminders before the trial periods expire, and an easily accessible “cancel” button located on a user’s account page.

Regulatory review

Noom is far from the only business that employs the use of automatic renewal subscriptions.  In today’s society, automatic renewal subscriptions are the norm, providing not only consumer convenience, but also a more certain revenue stream for businesses.  Given the common practice of such subscriptions, regulators have become more and more concerned about the explicit consent of consumers, particularly as it relates to automatic renewals that include a free trial.  In an effort to protect consumers in this evolving area, many states have, or are considering the expansion of, laws governing auto-renewals.

The Federal Trade Commission recently issued a release about automatic renewals in an effort to deter deceptive subscription practices.  The FTC’s policy statement on the issue warns companies to refrain from using “dark patterns” that trick a consumer into being trapped by a subscription service.  The FTC stated that companies will face legal action, including civil penalties, if their subscription programs fail to (1) clearly and conspicuously disclose all material terms of the product or service, including how to cancel, deadlines a consumer must act by to stop further charges, and the amount and frequency of such charges; (2) obtain the consumer’s express informed consent before charging for products and services; and (3) provide a simple and easy method of cancellation that is at least as easy to use as the method of initial purchase.

In addition, several states have laws currently on the books regarding these programs, including California.  California’s existing automatic renewal law requires businesses to, among other things: (1) clearly and conspicuously present the terms of any automatic renewal; (2) obtain the consumer’s affirmative consent to the automatic renewal’s terms before charging for an automatic renewal; (3) provide consumers with an acknowledgement of the automatic renewal’s terms and cancellation policy in a manner capable of being retained by consumers after purchase; (4) provide consumers with an easy way to cancel the automatic subscription; (5) allow consumers who sign up online to terminate the automatic renewal exclusively online; and (6) provide notice of material changes in the terms of the automatic renewal before implementation of said material changes.  Cal. Bus. & Prof. Code § 17602.

Recent amendments to California’s current automatic renewal law will require businesses to also: (1) send an additional notice explaining how to cancel three to 21 days before the expiration of free or promotional trial subscriptions that last more than 31 days; (2) provide an option for subscribers who signed up online to immediately cancel subscriptions online at will; (3) send a reminder notice 15 to 45 days before a subscription with an initial term of one or more years renews; and (4) include a link or other electronically accessible method directing consumers to the cancellation process, if notice is sent electronically.  2021 Cal. Assembly Bill No. 390.

Colorado and Delaware also have automatic renewal laws that went into effect this year.  These laws mirror California’s current law and generally require: (1) clear and conspicuous disclosure of key terms; (2) consent to automatic renewal terms; (3) notice of renewal reminders 25 to 40 days before any automatic renewal in Colorado, and 30 to 60 days before any cancellation deadline in Delaware; and (4) an easy mechanism for canceling the subscription.

Takeaway: Businesses offering automatic subscriptions should stay up to date on this rapidly evolving area of the law.  When developing automatic subscription policies, companies should provide consumers with clear information about the business’ automatic renewal program, especially concerning renewal dates, cancellations, and the expiration date of any free trials.  Consumers should also be given an easily accessible way to cancel automatic subscriptions.

Trademarks meet NFTs: Hermès sues NFT creator over MetaBirkins

As anticipated by those watching this space, Hermès filed a lawsuit in New York federal court against Mason Rothschild, an individual who created a collection of non-fungible tokens (NFTs) called “MetaBirkins,” which depict fuzzy versions of the iconic Hermès Birkin bag. The complaint alleges that Rothschild advertises the MetaBirkins “using the Hermès Federally Registered Trademarks” and “rips off Hermès’ famous BIRKIN trademark by adding the generic prefix ‘meta’ to the famous trademark BIRKIN” and that the use of the Birkin trademark misleads consumers and misidentifies the source of goods. As a result, Hermès’s complaint asserts claims for trademark infringement of the Birkin word mark, trade dress infringement, trademark dilution, false designation of origin, cybersquatting, and injury to business reputation and dilution under federal and state law.

In early December 2021, Rothschild started selling the MetaBirkins, the first of which sold online for a whopping $42,000. (By contrast, an authentic Hermès Birkin bag retails for approximately $13,000.) Shortly thereafter, Hermès sent a cease-and-desist letter to Rothschild and asked OpenSea, the NFT marketplace selling the MetaBirkins, to remove the infringing NFTs from its website, asserting that the MetaBirkin NFTs violated Hermès’s intellectual property. Although OpenSea removed the listings, Rothschild moved the MetaBirkins to another online exchange and continued to advertise and sell the MetaBirkins on his website. And in a futile attempt to appease Hermès, Rothschild added a disclaimer to his website stating that the MetaBirkins were “not affiliated, associated, authorized, endorsed by, or in any way officially connected” with Hermès, but inexplicably linked the disclaimer to the Hermès website, thus eliciting an allegation from Hermès that the disclaimer only caused further confusion among consumers that Hermès was sponsoring the MetaBirkin NFTs.

Additionally, after receiving the cease-and-desist letter, Rothschild took the dispute to social media to publicly defend his actions. In a series of Instagram posts, Rothschild asserted that his actions were protected from liability by the First Amendment and that the MetaBirkin NFTs were his artistic interpretations, likening his work to that of Andy Warhol’s famous Campbell Soup artwork. He also claimed that his activities constituted fair use and thus were permissible under the law.

Previewing Rothschild’s defenses in its complaint, Hermès pushed back on Rothschild’s First Amendment argument by asserting: “Although a digital image connected to an NFT may reflect some artistic creativity, just as a t-shirt or a greeting card may reflect some artistic creativity, the title of ‘artist’ does not confer a license to use an equivalent to the famous BIRKIN trademark in a manner calculated to mislead consumers and undermine the ability of that mark to identify Hermès as the unique source of goods sold under the BIRKIN mark.” Hermès further stated that the success of the MetaBirkin NFTs “arises from [Rothschild’s] confusing and dilutive use of Hermès’ famous trademarks.”

The luxury brand also maintained that Rothschild is not entitled to fair use protection because the use of the Hermès marks in connection with advertising the MetaBirkin NFTs is commercial in nature. Further, Hermès alleges that Rothschild’s use of the MetaBirkin term as his own trademark also stands in the way of his fair use defense. This is because a fair use defense does not provide protection from liability if the defendant uses the allegedly infringing mark as the defendant’s own trademark or source of goods. The MetaBirkins themselves were facing issues of counterfeits – where counterfeiters were creating tokens with similar names and selling fake versions of the MetaBirkin NFTs. Ironically, as outlined in the complaint, Rothschild claimed trademark rights in the term “MetaBirkins” when complaining of counterfeiters. To Hermès, Rothschild’s attempt to claim the term “MetaBirkins” as a source identifier is fatal to Rothschild’s fair use defense.

As in most trademark infringement cases, the remedies sought by Hermès include injunctive relief (e.g., stop selling and turn over access to the MetaBirkin NFTs) and damages (Rothschild’s profits). What makes this case different, however, is that the infringing goods are stored on blockchain technology, and in most cases, such transaction records cannot be changed once they have been entered. It also raises issues as to the third parties who purchased a MetaBirkin NFT and whether they will be allowed access to their NFT if a court rules against Rothschild.

Takeaway
This complaint is likely to be the first of many, and it raises a multitude of new issues in the world of NFTs and virtual fashion. Many brands are developing their own NFTs, filing trademark applications for virtual goods and services, and many have already entered the brave new world of the metaverse. Trademark law provides protections for many tangible items, but the extent of these protections in the digital world as well as what remedies can be granted are yet to be explored. When entering and exploring the virtual realm, brands, artists, and consumers of virtual goods should be aware of the trademark implications.

2022 fashion trend: New York fashion legislation addressing environmental sustainability and social accountability

The Fashion Sustainability and Social Accountability Act, a new New York Bill (the Bill), was introduced in October and was referred to a legislative committee on January 5, 2022. The goal of the Bill, which is sponsored by State Senator Alessandra Biaggi and Assemblywoman Anna R. Kelles, various fashion and sustainability nonprofits, and designer Stella McCartney, is to effectively address the environmental and social impact of large fashion companies and make them more accountable. If passed, the Bill would require any apparel or footwear companies doing business in New York with more than $100 million in annual global revenues to map out at least 50 percent of their supply chains, demonstrate where in the supply chains the companies have the greatest social and environmental impact, and set targets to reduce those impacts. “Doing Business” is broadly defined in the bill as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”

Additionally, the companies would have to create sustainability reports that disclose social and environmental information on their due diligence policies and activities conducted to identify and mitigate potential adverse impacts on the environment. These reports would need to identify the adverse impacts of greenhouse gas emissions and water, plastic, and chemical use, and outline how the companies will reduce these impacts in line with the United Nations Guiding Principles on Business and Human Rights. Companies would also be required to disclose their material production volumes and include the median wages of workers and how their wages compare to local minimum and living wages.

Should the Bill be passed, companies subject to the law will have 12 months to ensure they are compliant with the mapping directive and 18 months to produce their impact disclosures and reports. If companies fail to meet the requirements set out in the legislation, companies would be fined up to 2 percent of their annual revenue, with fines going to a Community Benefit Fund established by the Department of Environmental Conservation and used for environmental justice projects and communities. The New York Attorney General, or the designated administrator, would be responsible for enforcement of the Bill and would publish a publicly available list of the non-compliant fashion retailers and manufacturers.

The Bill will now go through the New York Senate and Assembly committees, with the sponsors aiming to bring the Bill to a vote in late spring or early summer of 2022. Sponsors are hopeful that the Bill will be passed by the end of this legislative session in June 2022.

Takeaway
If passed, the Bill would make New York, a leading fashion hub, the first state to pass legislation that broadly mandates consumer transparency regarding the environmental and social impacts of the fashion industry. Despite being introduced in New York, the requirements would affect many major retailers and manufacturers throughout the world who will have to ensure due diligence and disclosure compliance under the law.

Strike a Claim, Vogue: Runways Models Miss Their Mark in Publicity Suit

In September 2020, nearly 50 models filed suit against Moda Operandi (“Moda”) and Condé Nast (the parent company to Vogue) alleging that Moda and Vogue used their images from runway shows for the purpose of selling merchandise on Moda’s platform without written consent or compensation to the models. Plaintiffs alleged that the use of their photos might confuse or deceive consumers into thinking that the model was endorsing Vogue’s or Moda’s services. Plaintiffs also alleged that Moda and Condé Nast violated their right of publicity.

A year later, the Southern District of New York dismissed all of plaintiffs’ false endorsement claims against Condé Nast, most false endorsement claims against Moda, and most of plaintiffs’ right of publicity claims. Interestingly, the court noted that while this case was a classic right of publicity case, plaintiffs turned it into a false endorsement case in “a blatant effort to federalize a state law claim” in order to extend the reach to people with no rights under New York law.

The court held that the First Amendment barred false endorsement claims against Condé Nast. Under the Rogers test (which restricts Lanham Act liability to protect First Amendment interests), the use of a trademark is actionable only if the use of the mark or other identifying material (1) has no artistic relevance to the work and (2) is explicitly misleading as to the source or content of the work. Here, the court found that Vogue’s Runway Editorial (where the images were published) was an expressive work, even though it also had a commercial purpose (i.e., encouraging individuals to purchase clothing). Further, the court found that (1) the photographs were “artistically relevant” to the work as they were used in a document that summarized the season’s new fashions and (2) the use of the photos were not explicitly misleading as to the source or content of the work; they only represented that a model wore a particular designer’s clothing in a publicly viewed runway show and the viewer could purchase that clothing at Moda.

However, the court held that plaintiffs’ false endorsement claims against Moda could not be dismissed based on constitutional grounds, because Moda’s purpose was to display the pictures on its website to sell clothing, meaning its purpose was explicitly commercial. The court did dismiss some false endorsements claims against Moda, because (1) some models did not appear on Moda’s website and (2) others were mostly unidentifiable in the images.

Finally, plaintiffs brought right of publicity claims under New York state law, which prohibits the use for advertising or trade purposes the use of the name and likeness of a person without having obtained prior written consent. However, because most of the plaintiffs were not domiciled in New York State, the court held that they could not maintain a cause of action under New York law. The fact that the models worked in New York did not change the analysis. The court did not dismiss the right of publicity claims for the models who were residents of New York.

Takeaway: Not all states protect a right of publicity and attempts to gain a backdoor entry to state law protections will likely not work. This will limit the pool of potential plaintiffs bringing right of publicity claims and lessen a brand’s exposure based on where talent resides.

In addition, keep in mind that an expressive work need not be exclusively expressive to garner constitutional protections. If a brand creates work that has both commercial and expressive aspects to it, the company may still be protected from false endorsement liability if the purpose of the work, as a whole, is expressive.

Bimbo Bakeries Beats Back All-Butter Label Suit

The Southern District of New York dismissed a putative class action against Bimbo Bakeries (the parent company of Entenmann’s) that alleged the packaging on Entenmann’s “All Butter Loaf Cake” was misleading because the product contained soybean oil and artificial flavors, not only butter.

Plaintiff brought claims under New York’s consumer protection laws, which require that a plaintiff “plausibly allege that the deceptive conduct” be “likely to mislead a reasonable consumer acting reasonably under the circumstances.” In this analysis, a court considers the challenged advertisement as a whole, which includes disclaimers and qualifying language. In making a determination whether a reasonable consumer would be misled by an advertisement, “context is crucial”.

New York precedent applies these advertising standards to food and drink packaging that is allegedly false or misleading with respect to a product’s ingredients. Packaging is viewed as either ambiguous or unambiguous. A packaging label may be unambiguous and misleading or a packaging label may be ambiguous, but the ambiguity can be cured by looking at the list of ingredients or Nutrition Facts panel. Here, the court found that the “All Butter” claim was ambiguous, but the ambiguity could be resolved by the ingredient list. The court noted that a reasonable consumer would know that, even with the “All Butter” label, the product would likely have other ingredients that are in cakes, such as flour, sugar, milk and eggs.

Further, due to the possibility of more than one interpretation of “All Butter”, a reasonable consumer would need additional information to understand “All Butter” and would know in order to get that information, the consumer would need to look at the ingredient list. There, the consumer would see that the product contains soybean oil and artificial flavors. Therefore, when looking at Bimbo Bakeries’ labeling and marketing as a whole, it was not deceptive.

Interestingly, the court pointed out that this class action was one of many brought by the same plaintiff’s counsel and included a footnote listing numerous cases brought by plaintiff’s counsel.

Takeaway: Companies should be conscious of how their package claims may be interpreted. A label’s ambiguity could determine the trajectory of a lawsuit. As the court said, “when a product’s descriptions is merely vague or suggestive, every reasonable shopper knows the devil is in the details.” This means a reasonable consumer will be expected to look at other information on the label to dispel any confusion.

FTC Gone Viral: Commission Puts 700+ Companies on Notice About Deceptive Endorsements

Yesterday the Federal Trade Commission (“FTC”) announced that it sent “Notices of Penalty Offense” (the “Notice”) to over 700 companies in nearly every industrial sector, ranging from leading retailers, tech platforms, top consumer product companies, and major advertising agencies, warning them that they could incur significant civil penalties – up to $43,792 per violation – if they use endorsements in ways that run counter to prior FTC administrative cases.

The Notice outlines a number of practices that the FTC determined to be unfair or deceptive in prior administrative cases, including, but not limited to the following:

  • Falsely claiming an endorsement by a third party;
  • Misrepresenting whether an endorser is an actual, current, or recent user;
  • Continuing to use an endorsement without good reason to believe that the endorser continues to subscribe to the view presented;
  • Using an endorsement to make deceptive performance claims;
  • Failing to disclose an unexpected material connection with an endorser; and
  • Misrepresenting that the experience of endorsers represents consumers’ typical or ordinary experience.

The FTC stated it was prepared to use “every tool at its disposal” to go after bad actors with regard to deceptive endorsements and reviews. The move comes just months after the Supreme Court stripped the FTC of its authority to seek monetary relief directly in district court in consumer protection and antitrust matters under Section 13(b) of the FTC Act, which we previously wrote about here. In this latest move, the FTC has dusted off its hidden weapon – the Penalty Offense Authority – which allows the agency to seek civil penalties against a company that engages in conduct that it knows has been found unlawful in a previous FTC administrative order, other than a consent order.

By sending the Notice, the Commission aims to create the requisite knowledge to potentially institute civil penalty investigations later. It is important to note that while past endorsement actions have primarily resulted in consent orders, the FTC has been laying the groundwork to seek monetary penalties for quite some time.

The FTC makes clear on its list of recipients that inclusion on the list does not in any way suggest that the company has engaged in deceptive or unfair conduct. However, even brands not included on the notice list should take heed of the FTC’s warning – as this latest move indicates the FTC’s intention to pursue violations more aggressively.

Takeaway: This is another action by FTC chair Lina Khan signaling the Commission’s aggressive stance towards reviving its administrative powers under the FTC Act. We recommend that marketers review their overall marketing practices with respect to influencers, reviews and endorsements, including: (i) refreshing or implementing policies on endorsements and reviews for all relevant categories of individuals (i.e., employees, paid influencers, those who receive anything of value); (ii) reviewing active or pending campaigns to confirm compliance; (iii) collaborating with key stakeholders to conduct appropriate training, including for business / legal teams and influencers; (iv) assessing how influencers are engaged (whether directly or through an ad agency), including contractual best practices; and (v) reviewing the applicability of SAG-AFTRA obligations based upon the new influencer agreement and influencer waivers, which impact both signatories and non-signatories.

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