The Quarter Ham: California Court of Appeal Affirms Judgment in Unfair Competition and False Advertising Case

You can still get your quarter ham “STARTING AT $23.99” from Honey Baked Ham, Inc. according to the California Court of Appeal in its unpublished decision on November 8, 2016.  The Court of Appeal affirmed a trial court’s judgment that Honey Baked Ham, Inc. did not engage in unfair competition or in false or deceptive advertising by publishing a newspaper advertisement that touted its tasty product as “STARTING AT $23.99.”  The challenged statement was surrounded by a notched border, the phrase “STARTING AT” was in a smaller font size than “$23.99,” and it was followed, in even smaller font, by the words, “A limited number of Quarter Hams are available at each location. Offer available while supplies last.”  Wood v. Honey Baked Ham, No. B261248, 2016 Cal. App. Unpub. LEXIS 8150, at *3 (Ct. App. Nov. 8, 2016).

The plaintiff purchaser claimed to have mistaken the advertisement for a coupon good for the purchase of a quarter ham at the price of $23.99. She alleged that the advertisement was misleading because it was calculated to create the false impression that any purchaser who presented it could buy a quarter ham for $23.99 and that it was a deceptive “bait and switch” or “upsell” scheme calculated to lure customers into Honey Baked Ham’s stores “with a lowball price” and then “pressure them into paying a higher price.” Business and Professions Code section 17200, California’s unfair competition law, “prohibits any unfair, unlawful, or fraudulent business act or practice.”  Cal. Bus. & Prof. Code § 17200.  California’s corresponding false advertising laws, Business and Professions Code section 17500 and Civil Code section 1770(a)(9), prohibit false or misleading advertising statements and advertising goods and services without the intent to sell them as advertised.  Cal. Bus. & Prof. Code § 17500; Cal. Civ. Code § 1770(a)(9).  The challenged statements are evaluated under a “reasonable” consumer standard.  Honey Baked Ham, 2016 Cal. App. Unpub. LEXIS 8150, at *12-13. To state a claim, a plaintiff must show that “a significant number” of members of the public are “likely to be deceived.” Id. at *16.

Here, the relevant inquiry was whether a consumer could reasonably interpret Honey Baked Ham’s advertisement as a coupon to purchase a quarter ham at the exact price of $23.99. In concluding that Honey Baked Ham’s advertisement was not misleading, the Court of Appeal agreed with the trial court that “STARTING AT” meant exactly what is said: that the price of a quarter ham started at $23.99 but could be higher and that it could not be reasonably interpreted as offering all quarter hams at a single price of $23.99.  Id. The Court of Appeal noted that the plaintiff did not provide any evidence that the term “starting at” would likely deceive the public at large into believing that all quarter hams were priced at $23.99.  Id. at *18.  Indeed, “[c]ommon knowledge and experience” confirmed that the price of a quarter ham would depend on the size and weight of the particular ham.  Id. at *17.  In addition, the Court of Appeal found that the evidence did not compel a finding contrary to the trial court’s finding that Honey Baked Ham did not engage in a deceptive “bait and switch” or “upsell” scheme, noting that the evidence showed that the store at which the plaintiff made her purchase sold quarter hams at prices at or below $23.99 throughout the day at issue and that all the plaintiff had to do was to ask for a smaller ham to purchase one at that price.

“Starting at” pricing can be a mechanism by which a seller advertises a product at a low price to draw consumers into a store or to a website.  The risk from a consumer protection perspective is that upon arriving at the store or the website, the consumer will either find that the advertised product is not available or a salesperson will divert them away from the lowest priced item to a more expensive item in what is traditionally known as a “bait and switch.”  If a seller advertises a product which it has no intention of selling, but instead plans to sell a consumer a different product, usually at a higher price, the seller has engaged in unlawful “bait and switch” advertising.  The FTC has a guide that addresses “bait advertising,” 16 C.F.R. § 238 (2017).  The focus of “bait and switch advertising” from the FTC’s perspective is on the unavailability of the advertised product.  For example, it would be deceptive to not have a sufficient quantity of the advertised product to meet reasonably anticipated demand, unless the advertisement clearly and adequately disclosed that the supply is limited and/or that the advertised products are only available at designated outlets.  16 C.F.R. § 238.3(c).  In the Honey Baked Ham case, there was no allegation that Honey Baked Ham would not sell a quarter ham of the requisite weight at the advertised price or that it had run out of the hams at that price.  In addition, the advertisement disclosed that there were a “limited number” of hams at each location, which placed consumers on notice that supplies were limited.  Finally, there was no allegation that Honey Baked Ham failed to have in stock sufficient quantity of hams at the advertised price.  In fact, both the trial court and the Court of Appeal noted that the store at which plaintiff purchased her ham sold a substantial number of smaller quarter hams for $23.99 or less throughout the day. Honey Baked Ham, 2016 Cal. App. Unpub. LEXIS 8150, at *9.  Consequently, the plaintiff did not have a strong argument that the offer itself was deceptive in structure.  Rather, it was more a question of whether the “starting at” language clearly communicated that larger quarter hams could cost more.  The court held that “starting at” – even in smaller lettering – adequately communicated that $23.99 was a starting price and the product could be more expensive depending on size and weight.  Id. at *17.

On a cautionary note, it is wise for advertisers to remember that the Honey Baked Ham case considered only California unfair and deceptive acts and practices (UDAP) statutes and that some other states have more specific statutes that deal with advertisements where there is a range of possible prices and only the lowest price is advertised.  Consider the law in Massachusetts (which is not the only state with price range regulations): In that state, it is considered an unfair or deceptive act to state or imply that any products are being offered for sale at a range of prices or at a range of percentage discounts unless, among other things, the highest price or lowest discount in the range is clearly and conspicuously disclosed in at least the same size as the type size of the lowest price or highest discount in the range. See 940 Mass. Code Regs. 6.03(11).

There are arguable distinctions between retail store price range advertising and sales involving a single product, such as ham, that is priced according to weight.  But, it is important to remember that “starting at” pricing can under some circumstances connote a range of prices, and specific state laws on price advertising can come into play beyond the general UDAP laws.

It is also important for advertisers to remember that some municipalities have local laws that can apply in cases where there is an implied range of prices for items offered in an advertisement.  In New York City, for example, the municipal consumer protection (New York City Administrative Code, tit. 20: CONSUMER AFFAIRS, sec. 5-12) law states that when a range of prices is stated, or the existence of a range is implied, the highest price must be stated in figures at least as tall and broad as the figures in the lowest price stated. Furthermore, the New York City regulation specifically includes “starting at” as an example of a phased that connotes a range of prices.

And, why was it important to consider whether the challenged advertisement in the Honey Baked Ham case was surrounded by a notched border?  At issue here not only was whether consumers would understand the meaning of “starting at” but also whether the challenged advertisement was an “advertisement” or a “coupon.”  Why would that matter?  Generally, an advertisement for an item at retail is an invitation to the consumer to come into the store and offer money in exchange for the advertised product.  Acceptance occurs at the moment the seller accepts that payment. In contrast, a coupon, like the kind you might find in your Sunday circulars, is more than an invitation to make an offer.  It is an offer to sell the consumer the specific products identified for the specific price or discount at a specific store location during the time period identified.  A coupon is usually time-limited and often is subject an array of promotional terms.  The plaintiff in the Honey Baked Ham case alleged that the public statement from the ham seller was a unilateral contract in the form of a coupon.  She demanded fulfillment of the terms of that contract notwithstanding the use of the phrase “starting at.”  The court found that the advertising was “advertising,” not a coupon, notwithstanding the notched border, and then the court proceeded to interpret the advertising language.

TAKEAWAY:  Price is almost always a material term in advertising.  When an advertised price is presented in a format that might lead consumers to believe that the advertising is a precise and definite promotional offer, there is a risk that a court could conclude that the seller is contractually bound by its terms.  In such a case, the phrase “starting at” might not give the advertiser the flexibility to charge a higher price.  In a lawful advertisement, a seller must present the price of an item in a truthful and non-misleading fashion.  Use of “starting at” as a qualifier can work in some instances to communicate that the prices will vary by weight/size/condition, etc., but consider using more descriptive words such as “Starting at $XX.XX for a 5 lb. quarter ham.”  Moreover, think about whether the use of “starting at” implies a range of prices for items sold at retail.  There may be specific regulations that apply depending on where you are advertising that could mandate font size or even the volume of items that are available at the advertised low price (or highest discount).

 

 

Subway Turns Back Class Action Over Free Sandwich Text Message Promotion

Subway scored a recent victory when a federal court dismissed a putative class action brought by two customers over a free sandwich promotion alleging violations of the Telephone Consumer Protection Act (“TCPA”) after allegedly receiving a text message offering a free 6” Oven Roasted Chicken sub.

Subway moved to compel arbitration, seeking to enforce the arbitration provision in the plaintiffs’ contracts with their mobile phone carrier. The clause mandated arbitration for “any and all claims or disputes in any way related to or concerning this [agreement].”  The plaintiffs could have opted out from the clause within 30 days of activating their phones.  They did not.

In granting Subway’s motion, the court found that the text message was within the scope of the arbitration agreement, the agreement was not procedurally or substantively unconscionable, and that – under California law – equitable estoppel applied to allow Subway, a non-signatory of the arbitration agreement, to enforce the agreement. Because the court decided that all of the plaintiffs’ claims must be sent to arbitration, the court exercised its discretion and dismissed the case.

Takeaway: Companies who engage in direct marketing through consumer technology products should be mindful that a consumer’s user agreement may offer them protection from suits arising out of such marketing.

 

States Act to Regulate Fantasy Sports

In attempts to lessen the uncertainty that still surrounds the legality of fantasy sports, Maryland and Florida introduced measures to clarify the rules of the road for the likes of DraftKings Inc. and FanDuel Inc. Maryland’s regulations, adopted by the state Office of the Comptroller, went into effect January 2, while Florida’s House of Representatives has yet to consider the new bill introduced January 4.

The Maryland regulations set the minimum age for players at 18, rather than 21 as in other states, and prohibit the depiction of minors or students—a prohibition which, in effect, restricts daily fantasy sports operators from offering college-based fantasy leagues. Professional athletes may not participate in contests in their sport. From a financial perspective, the regulations limit participant monthly deposits to $1,000 and do not include a high registration fee for operators. In the other states that have passed legislation or issued regulations in this area, the restrictions on fantasy sports operators are generally stricter.

The Florida bill, H.B. 14, would make clear that fantasy sports contests are not illegal in the state, which prohibits gambling. The bill’s sponsor compared fantasy sports contests to fishing or bowling contests based in part on skill. The bill would require that the value of all prizes be made known to participants at the start of play, and that the outcome of the contests be based on the skill or knowledge of the players.

Takeaway: Now that increasing numbers of states are articulating the legal parameters of fantasy sports, advertisers have more to guide them in determining the risks of running promotions that some regulators may consider to be illegal lotteries. Stay tuned as more states step in to corral or legitimize the wild west of online fantasy sports games.

See some of our previous reporting on this subject here and here.

 

 

Seventh Circuit Upholds Indiana Ban on Robocalls

Last week, the U.S. Court of Appeals for the Seventh Circuit upheld an Indiana statute banning robocalls, concluding that the statute was evenly applied in an effort to prohibit unsolicited calls made without a recipient’s consent regardless of the content of the message or the identity of the caller. Patriotic Veterans, Inc. brought suit arguing that the Indiana statute violated the First Amendment and excluded all political messaging which resulted in content-specific discrimination as applied to the organization and others like it.  The non-profit organization uses political robocalls as part of its various campaigns to inform voters about candidates and their positions on veterans’ issues.

Takeaway: States and the Federal Government are continuing to increase the measures taken to protect consumers from receiving unwanted cold calls and robocalls.  Advertisers and marketers who use such calls are advised to note the intricacies and differences between state and federal statutes and the regulations concerning such activity.

 

Court Allows Copyright Infringement Claims to Live Long and Prosper Against Trekkie

A federal judge recently held that an unauthorized “Star Trek” fan film created by Axanar Productions was “objectively substantially similar” to Star Trek. The court found that Axanar sought to make a “professional production” with a trained crew, including many individuals who had worked on authentic Star Trek productions, while raising over $1 million in funding.  The court was unwilling to find copyright infringement at this stage in the case, leaving the jury to ultimately determine whether the film is “subjectively substantially similar.”  Importantly, the court rejected Axanar’s fair use claims, holding that: (a) the films are a commercial use even if the films were to be distributed for free, and (b) the films are not a parody because they do not criticize the substance or style of the underlying work – rather the films are intended to serve as a prequel to The Original Series.

Takeaway:  Advertisers may wish to rely on parody as a fair use defense to copyright infringement.  To successfully allege a parody defense, advertisers must remember that their ads must criticize the substance or style of the underlying work.

New Jersey Prohibits Company from Contractually Banning Online Customer Reviews

This week, NJ Attorney General Christopher Porrino and the Division of Consumer Affairs settled with Fertility Bridges, Inc., a fertility clinic operating in California and Illinois, over the clinic’s practice of contractually barring consumers from posting online reviews of their experiences with the clinic and its personnel.

The provisions, set forth in the Terms of Use and various Service Agreements, allegedly required that any online review of the company be vetted by the company’s legal department in advance and warned consumers that anonymous online reviews that were not vetted could eventually be tracked through IP addresses. The contract also included “libel fines” of up to $10,000 for each day the banned content remained online.

The Division of Consumer Affairs alleged in its Consent Order that the clinic’s inclusion of the clause in its contracts and subsequent attempt to enforce the clause constituted unconscionable commercial practices in violation of the New Jersey Consumer Fraud Act. Under the settlement, the clinic agreed to pay a $1,500 fine and remove the relevant provisions from its consumer contracts.

Takeaway: On the same day this consent order was filed, President Obama signed into law the Consumer Review Fairness Act, which prohibits the inclusion of contractual provisions that seek to restrict consumers from posting reviews on the Internet.  This case serves as a reminder to businesses not to impose overly-burdensome restrictions on consumers.

FTC Settles Data Breach Case with AshleyMadison for $1.6 Million

The Federal Trade Commission (“FTC”) settled with online dating website AshleyMadison.com for $1.6 million stemming from FTC and state actions brought against the company as a result of a July 2015 data breach that exposed the profile and account information of approximately 36 million users. In addition to the settlement, AshleyMadison.com must also implement a “comprehensive data security plan” and third-party assessments to be completed every two years.

 The FTC and 13 states charged the company with deceiving consumers and inadequately protecting consumer information from exposure.  Specifically, the company used artificial “fembots” to direct consumers to the profiles of fake women in an attempt to increase subscription memberships.  The FTC asserted that Ruby Corp., AshleyMadison’s parent company, wrongfully claimed that personal user information, such as birthdates and relationship statuses, was secure when in fact the company lacked any form of comprehensive data security policies.

Takeaway: Social websites, including dating websites and apps, may wish to consider avoiding the creation of fake user profiles or using technology such as “fembots” to increase paid subscriptions.  Additionally, social websites and apps should consider developing a comprehensive consumer data security policy as part of its company strategy in order to safeguard member information.

Join Reed Smith at the 2017 ANA Advertising Law & Public Policy Conference

The digital world is growing and lawyers are increasingly engaged in every aspect of the process, from content creation to consumer protection. Lawyers are helping CMOs, brand managers, and creative directors in producing stellar marketing campaigns leverage a wide array of resources.

Our very own Doug Wood will be moderating:

TWEETING WITH WORDS

For a second year, the conference kicks off with a fast-paced exchange among leading lawyers in the business with live tweets from attendees— in 140 characters or less—and their answers must be given in 140 seconds or less! Send your tweets using the hashtag #ANAAdLaw. No limits! Ask whatever you’d like about the new administration, the FTC, FCC, and NAAG, SAG-AFTRA, data security, piracy, bots, technology, measurement, viewability, metrics, and media transparency. It’s all fair game.

2017 ANA Advertising Law & Public Policy Conference

Register at ana.net.

We look forward to seeing you there.

FTC Settles with Vemma Nutrition for $238 Million Arising from Pyramid Scheme

Last month, the Federal Trade Commission (“FTC”) settled with Vemma Nutrition Company for allegedly engaging in deceptive business practices and sales tactics akin to a pyramid scheme. According to the FTC, the company made deceptive income claims to its distributors and unsubstantiated health claims about its products, specifically representing that consumer demand for the products was higher than it actually was.  Vemma failed to disclose that most of its “affiliates” would not earn the income suggested by the depictions of wealth and luxury included in company advertising and recruiting materials.  Instead, the distributors’ compensation largely rested on recruitment of other distributors rather than product sales.

The settlement calls for Vemma to pay a $238 million judgment, subject to partial suspension, and requires the company to surrender business and real estate assets and produce compliance reports from an independent auditor for the next 20 years. Additionally, the company is barred from engaging in any business practice that encourages recruitment-based compensation or ties compensation to purchases. 

Takeaway: Marketers engaging in multi-level sales practices should make sure that sales-person compensation terms are fully disclosed in any recruiting materials and avoid using unrealistic depictions of wealth and luxury to recruit distributors.

 

 

Telemarketer Penalized for Deceptive Tech Support Marketing

The Federal Trade Commission recently settled with Florida-based company Inbound Call Experts on December 22 for deceiving thousands of consumers with its telemarketing scheme.

Under the final order, the company must pay a penalty of $10 million to settle the FTC’s charges that it used software designed to make consumers think their computers had viruses and malware, followed by high-pressure telemarketing sales pitches. Inbound Call Experts deceived the consumers into buying its products and services on the premise of these misrepresentations, the FTC stated in a complaint.

Inbound Call Experts may not make misrepresentations while selling a product or service, including misrepresenting that they have identified performance or security issues on consumers’ computers. Before the FTC halted the company’s operations in 2014, consumers had been induced to spend more than $120 million on its products and services.

Takeaway: The FTC has been on the alert for marketing programs that seem to take advantage of particular consumer vulnerabilities, including lack of technical knowledge. Companies advertising to these populations should be careful not to make misrepresentations that would exploit such vulnerabilities.

 

LexBlog