FTC Sends Warning Letters to Companies Over Warranty Claims

Earlier this week, the Federal Trade Commission (“FTC”) sent warning letters to six (6) major companies that market and sell automobiles, cellular devices, and video gaming systems. The FTC indicated that it has concerns about the companies’ statements that consumers must use specified providers to keep their warranties intact. Unless warrantors provide the parts or services for free or receive a waiver from the FTC, such statements generally are prohibited by the Magnuson-Moss Warranty Act, and may be deceptive under the FTC Act. The FTC has requested that each company review its promotional and warranty materials to ensure that they do not state or imply that warranty coverage is conditioned on the use of specific providers, and, if necessary, modify such materials. The warning letters state that the FTC will review the companies’ websites after thirty (30) days and that failure to correct any potential violations may result in an enforcement action.

Takeaway: Companies should review and, if necessary, update their product warranties for compliance with the Magnuson-Moss Act and the FTC Act, as these recent warning letters may signal additional enforcement by the FTC.

“Weight Loss” vs. “Weight Management”: Vitamin Shoppe Sidesteps False Advertising Suit

Putative class representative Andrea Nathan renewed her efforts to hold Vitamin Shoppe, Inc. liable under California’s Unfair Competition Law, False Advertising Law, Consumer Legal Remedies Act, and breaches of express and implied warranties over Vitamin Shoppe’s “Garcinia Cambogia” dietary supplements after a California district court judge tossed the suit in February of this year. Vitamin Shoppe markets two products that contain the supplement, for “appetite control” and “weight management” respectively.  Nathan cited several studies in her first complaint, stating that the products’ only active ingredients (hydroxycitric acid and chromium) “are scientifically proven to be incapable of providing [] weight-loss benefits.”  The court, however, found such studies to be irrelevant because Vitamin Shoppe’s advertising does not promote weight-loss benefits, as opposed to “appetite control” and “weight management,” and dismissed Nathan’s complaint with leave to amend.

Nathan filed her first amended complaint a week later, which purports to fix the pleading deficiencies noted by the court. However, as Vitamin Shoppe pointed out in its motion to dismiss, it relies on the same studies as the original complaint and still mentions the fatal phrase “weight loss” over thirty times.  Vitamin Shoppe’s motion to dismiss remains pending.

Takeaway: In false advertising suits, specific language matters.  To survive dismissal, parties should plead only the specific claims made in the allegedly false advertisement.

FTC Slams Anti-Aging Supplement Seller for False Advertising

The Federal Trade Commission (“FTC”) recently reached an agreement with New York-based Telomerase Activation Sciences, Inc. and its CEO Noel Patton (collectively, “TA Sciences”), barring TA Sciences from making false or unsubstantiated claims regarding the efficacy and health benefits of two of TA Sciences’ products. According to the FTC’s administrative complaint, TA Sciences falsely advertised that its products reverse aging, prevent and repair DNA damage, restore aging immune systems, increase bone density, reverse the effects of aging skin and eyes, prevent or reduce the risk of cancer, and decrease the time needed for skin to recover after medical procedures. In addition, the FTC alleged TA Sciences misrepresented that a television segment it paid for in 2012 was independent, educational programing instead of advertising, and that TA Sciences deceptively represented that consumers in its advertisements were independent, impartial users, when in fact they received free product samples worth up to $4,000 in exchange for their endorsement.  Finally, the FTC claimed TA Sciences gave promotional materials containing false or unsubstantiated claims to other supplement marketers.

The proposed order settling the FTC’s complaint prohibits TA Sciences from making any representation about the health benefits, performance, efficacy, safety, or side effects of any covered product unless the representation is “non-misleading” and is supported by “competent and reliable scientific evidence.” It also prohibits TA sciences from misrepresenting that any paid commercial advertising is independent programing or that any endorser is an independent user of the product, and requires disclosure of any material connection between a product endorser and the company.  Finally, the proposed settlement order requires TA Sciences to notify its licensees of the order and monitor those licensees’ advertisements to ensure compliance, and to inform consumers who purchased the disputed products within the past year about the order.

Takeaway: The FTC issues an administrative complaint when it has “reason to believe” that the law has been or is being violated and initiating a proceeding is in the public interest.  To minimize risk of liability, advertisers should disclose paid television segments as advertisements rather than independent or educational programming, and also disclose when consumers in advertisements receive free product samples in exchange for endorsement.

High Stakes: Iowa Ends Up Paying $1M For Blocking Pro-Marijuana T-Shirts

The state of Iowa will be covering the bill in a protracted lawsuit over Iowa State University’s decision to bar a chapter of the National Organization for the Reform of Marijuana Laws (“NORML”) from using the university’s trademarks on T-shirts. ISU students won approval in 2012 to use the ISU mascot bearing a marijuana leaf and the slogan “Freedom is NORML at ISU,” but the university reversed itself after an article on the story drew the ire of state legislators.  The students then sued the university, claiming school administrators infringed the First Amendment by imposing more stringent trademark policies “expressly to restrict” NORML’s pro-marijuana speech.  The trial judge and the Eighth Circuit both sided with the students, holding the administrators “at least implied that the additional scrutiny imposed on NORML ISU was due to the views for which it was advocating” and “were motivated at least in part by pressure from Iowa politicians.”

Last month, an Iowa federal judge ordered the state to repay $598,000 in legal bills to the lawyers who represented the students through the district court proceeding. This amount was awarded in addition to the amounts the state agreed to pay in settling the action, namely, $193,000 to the lawyers for legal bills associated with the Eighth Circuit appeal and $150,000 to the students.

Takeaway: This case provides a warning of the potentially steep costs of viewpoint discrimination in deciding who may use state university logos or mascots, regardless of outside press or political pressures.

Reed Smith Incoming First-Year Associate Erika Auger Publishes Law Review Note

Erika Auger, a third-year law student at Chicago-Kent College of Law, will have her note published in The Chicago-Kent Law Review.  Erika’s note, The “Art” of Future Life: Rethinking Personal Injury Law for the Negligent Deprivation of a Patient’s Right to Procreation in the Age of Assisted Reproductive Technologies 94 Chi.-Kent. L. Rev. __ (2018), will appear in the 94th volume later this year.  Erika will join the Chicago office of Reed Smith, focusing her practice on advertising and marketing law in the Entertainment and Media Industry Group.  The announcement from Chicago-Kent can be found here.

The Chicago-Kent Law Review began as the “Chicago Kent Review” in 1923. By the 1930s, the journal had adopted its current name and began publishing scholarly articles by law professors and practitioners.

Company Settles Credit Card Laundering Scheme With FTC

Last month, the FTC announced a $1,384,500 settlement with Michael Abdelmesseh and KMA Merchant Services, LLC in a lawsuit regarding a deceptive credit card laundering scheme. The FTC alleged that the defendants telemarketed fraudulent business opportunities to consumers that involved false promises of thousands of dollars in income as commission for loans made to small businesses referred by those consumers in violation of Section 5 of the FTC Act and the Telemarketing Sales Rule.  The settlement requires the defendants to stop payment processing or acting as an independent sales organization or sales agent, engaging in credit card laundering, and disclosing, using, or benefitting from previously obtained consumer information.  They must also destroy consumer information within thirty days of FTC direction to do so, obtain order acknowledgments, and engage in compliance reporting, monitoring, and recordkeeping.

Takeaway: As part of the agency’s effort to protect consumers and small businesses, the FTC is dedicated to uncovering the often many layers of credit laundering schemes and will order the destruction of improperly obtained consumer information in the process.

The Chain Gang – FTC’s New Blockchain Working Group May be Good News for Marketers

One of the greatest developments for marketers in 2018 is likely to be the proliferation of new and innovative applications on the blockchain in the context of marketing and promotion, particularly in connection with loyalty programs, ad fraud mitigation, and ongoing CRM activities that combine brand affinity and peer-to-peer influencing.  The potential magnitude of the changes that the promotion marketing industry could see in the next 12 months, especially in the loyalty area, is simultaneously thrilling and daunting.  The technological challenges of simply understanding the blockchain is hard enough.  In addition, cryptocurrency fraud and money laundering concerns have delayed public acceptance of blockchain-based promotional activities.

The Federal Trade Commission, in furtherance of its consumer protection mission, has established an internal working group that is dedicated to developing FTC staff expertise in cryptocurrency and blockchain technology.  The working group, according to an announcement by the Neil Chilson, the FTC’s Acting Chief Technologist, will seek to do this through “resource sharing” and by hosting outside experts.  The working group is also designed to facilitate internal communication and external coordination on enforcement actions and other related projects.  Finally, the group seeks to serve as an internal forum for brainstorming potential impacts on the FTC’s dual missions and how to address those impacts.

These are worthy goals and the development of expertise at the Commission, especially given the staff’s record of openness to external ideas and input, could be the sort of vitamin today’s promotion marketers need.  As the FTC has noted, there is no shortage of fraud related to blockchain schemes and particularly cryptocurrencies.  Just last month, the FTC sought and obtained an injunction against four individuals who promoted a chain referral schemes known as Bitcoin Funding Team and My7Network.  (A “chain referral scheme” is essentially a form of pyramid scheme in which people are induced to make a payment to an earlier participant and pay a fee to the operator.  The entire enterprise is designed to recruit new members and generate payments from them.)  According to the FTC’s complaint, the defendants presented the enterprise as a money-making opportunity and falsely claimed that participants could earn a substantial income by participating.

Other examples of deception under the FTC’s purview that involve the blockchain and/or cryptocurrency include:

  • Butterfly Labs – In 2016, a company and two of its principals settled charges that they charged consumers thousands of dollars for its Bitcoin mining machines, but then failed to deliver the computers until they were practically useless, or in many cases, did not provide the computers at all. The allegations really amounted to misrepresentations about what the marketers were selling, in what condition, and when the products would be shipped, but the claims were informed by the marketplace for bitcoin mining equipment.
  • Equiliv Investments – In 2015, a company marketed an app called “Prized” that was advertised as a portal for earning points for playing games or downloading affiliated apps. Participants could then spend those points on rewards including clothes, gifts cards, and other items.  Unbeknownst to the customers, the company was hijacking the users’ devices and were using their computing resources to mine for cryptocurrencies, including DogeCoin, LiteCoin, and QuarkCoin.  The FTC and the New Jersey Attorney General teamed up to settle the charges with an injunction and a $50,000 monetary judgment.
  • “Token”-based programs – The FTC has signaled that it is watching for “so-called token offerings” that involve the sale of “tokens” in exchange for the use of a future service. The staff is particularly interested in claims that may be made in connection with such promised future services (reminiscent of trading stamp enforcement) and even the possible interplay between FTC and SEC jurisdiction regarding marketing of “securities.”

 

At the same time, the FTC is cognizant that the blockchain has tremendous promise in the areas of micropayments, data privacy, and identity security.  In many ways, the blockchain can be a solution for consumer protection challenges not the cause of them.  Consequently, the FTC is interested in ensuring that its work in this space protects consumers but also fosters the development of commercial products and services that enhance consumers’ lives and commerce overall.

Why This Matters:  The promotion marketing community should be heartened that the FTC has devoted resources to maintaining a technological savviness, especially in the area of the blockchain.  There are a growing number of applications in the promotion marketing space, especially in the loyalty area, where peer-to-peer interaction can be harnessed to enhance brand activation.  The transparency and openness of the FTC staff is a welcome sign and an invitation to the marketing community to stay engaged with these key regulators.

Let the Chips Fall Where They May: Frito-Lay Litigates No Artificial Flavors Claim

Last month, a federal judge denied Frito-Lay’s motion to dismiss a lawsuit involving allegations that its “Salt and Vinegar Flavored Potato Chips” contain artificial flavors. Specifically, the plaintiffs asserted that Frito Lay: (1) did not specify the type of malic acid on the ingredient panel; and (2) falsely labeled the chips as containing no artificial flavors, because the chips contain malic acid (which the plaintiffs allege is artificial). Frito-Lay argued it is under no obligation to disclose the specific type of malic acid because “malic acid” is the ingredient’s common name and that its “no artificial flavors” claim on the packaging is truthful because malic acid is a flavor enhancer rather than an artificial flavor.  The judge could not determine whether the Food, Drug, and Cosmetic Act (“FDCA”) preempts the claims and denied the motion based on factual determinations relating to the plaintiff’s assertions, noting that if malic acid is determined to be an artificial flavor, a reasonable consumer would be deceived by Frito-Lay’s packaging.

Takeaway: Depending on the outcome of this case, the use of flavor enhancers in a product may impact the ability for advertisers to make certain “no artificial flavors” claims.

Out of Juice: Judge Denies Class Cert. in Tropicana False Label Suit

In 2011, plaintiffs launched a putative class action with class members from California, New York, New Jersey, and Wisconsin in a New Jersey district court against Tropicana Products, Inc., a division of PepsiCo, Inc. over Tropicana’s claim that its not-from-concentrate orange juice is “100% pure and natural.” The plaintiffs asserted that Tropicana’s processing methods—which allegedly include pasteurization, deaeration, addition of flavors and aromas, and long-term storage, according to the complaint— should preclude Tropicana from labeling its products as “pure and natural.”  They sued Tropicana for unjust enrichment, breach of express warranty, violation of the New Jersey Consumer Fraud Act, and for injunctive and declaratory relief.

However, in January of this year, the judge denied the plaintiffs’ bid for class certification. Although the court found the plaintiffs’ claims satisfied the requirements of numerosity, commonality, typicality, and adequacy under Rule 23(a), they failed to satisfy the predominance, superiority, and ascertainability requirements of Rule 23(b)(3) and lacked standing to pursue injunctive relief under Rule 23(b)(2).  In particular, the court held that the “plaintiffs’ common law and New Jersey consumer fraud claims are plainly unsuitable for class certification because each of these claims requires individualized proof.”  Further, the court stated the remaining California and New York consumer protection law claims do not meet the Third Circuit’s ascertainability requirement because proposed class had not detailed how they will identify all of the proposed class members, as only one retailer out of potentially hundreds had expressed that it could provide the data necessary to identify class members.  The plaintiffs moved for reconsideration of the denial last month, which remains pending.

Takeaway: Advertisers facing class action lawsuits could consider using this case to remind the court that claims that require individualized proof, such as those brought under the New Jersey Consumer Fraud Act, are likely unsuitable for class action suits.

Nine Lives Indeed: Grumpy Cat Wins IP Lawsuit Against Beverage Company

Anyone who has been on the internet since 2012 likely recognizes the ubiquitous frowning face of “Grumpy Cat,” real name Tardar Sauce, emblazoned upon memes, videos, and products. Her fame and market power is far from restricted to the internet though; since her internet debut, she has appeared on television shows, starred in advertisements for major brands, and even authored New York Times bestsellers.  Her owners Tabatha and Bryan Bundesen founded Grumpy Cat Ltd., which owns various IP rights associated with the Grumpy Cat brand.

In late 2015, Grumpy Cat Ltd. filed suit against beverage company Grenade Beverages LLC and its owners Paul and Nick Sandford for trademark and copyright infringement. Grumpy Cat Ltd. entered into a license agreement with Grenade in 2013 allowing the company to market a line of iced coffee beverages, which was later allegedly breached when Grenade began marketing additional products featuring Grumpy Cat’s brand.  Two years of litigation later, in January 2018, a California jury sided with Grumpy Cat Ltd. and awarded it $710,000 for trademark and copyright infringement.  Last month, the parties submitted additional briefing to the court to decide the remaining claims of cybersquatting and declaratory relief, which remain pending.

Takeaway: Advertisers should note that taking content from pop-culture, including memes, may be subject to intellectual property infringement claims from its owners.  To minimize risk of liability, advertisers that obtain licenses from IP owners should take care to operate within the bounds of license agreements and seek approval from licensors before marketing potentially infringing products.

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