Aug 09, 2006
In This Issue
More than three quarters of U.S. adults have registered their primary telephone numbers on the national Do-Not-Call registry, the Federal Trade Commission said in its annual report to Congress last month.
For the most part, marketers appear to be complying with the Do-Not-Call provisions of the Telemarketing Sales Rule as well, according to the report.
Seventy-six percent of U.S. adults had listed their phone numbers with the registry as of December 2005, up from 57% in 2004, according to the FTC. Ninety-two percent of consumers surveyed who registered their numbers said they experienced a decrease in telemarketing calls. As of September 30, 2005, the FTC had received just 1.2 million complaints, representing about 1% of the more than 107.4 million numbers on the registry at the time.
“This is indicative of both a high degree of compliance by telemarketers and a meaningful reduction in unwanted telephone calls for consumers who have registered their telephone numbers,” the FTC’s report said.
At the same time, although registry usage is high, the number of groups paying to access it is declining. In 2005, 6,794 organizations paid $18 million to access the registry, down from 7,734 organizations in 2004. The registry costs telemarketers $56 per area code up to a maximum of $15,400. The first five area codes are free. In 2005, 58,023 organizations accessed the registry for five or fewer area codes, the report said.
The FTC filed six cases alleging do-not-call violations in 2005, bringing the total to 14, the report said. As of September 30, 2005, the FTC had reached settlements with 10 of the 14 defendants. Telemarketers who violate the requirements of the Do-Not-Call registry are subject to up to $11,000 in fines per violation.
Significance: As suggested by the decline in organizations accessing the registry, the Do-Not-Call registry, which has proved wildly popular with U.S. adults, has forced marketers to turn their efforts away from telemarketing in favor of other channels to sell their products.
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The marketers of an alleged phony cure-all who defaulted on a Federal Trade Commission order must now pay almost $120 million in redress.
In a June 2003 complaint, the FTC accused the promoters of Seasilver—a liquid dietary supplement containing aloe vera, phyto-silver sea vegetables, herbs, cranberry concentrate, and other ingredients—of false and unsubstantiated claims in their ads for the product.
The Carlsbad, California-based outfit that markets Seasilver claimed that its product, a liquid multivitamin/multimineral/amino acid product, will “balance your body chemistry,” “cleanse your vital organs,” “purify your blood and lymphatic system,” “oxygenate your body’s cells,” “protect your tissues and cells against challenges,” and “strengthen your immune system.” The company’s founder, Bela Berkes, is said to have developed Seasilver in response to “health challenges,” after he began “a life-long, world-encompassing quest to learn nature’s secret to good health.” In recent years, Seasilver’s alleged benefits are touted on thousands of Web sites operated by distributors. In March 2003, Bela Berkes stated that Seasilver USA was earning $15 million a month and $180 million a year from selling Seasilver.
The FTC alleges that many of the claims made for Seasilver are illegal. For example, the company’s 2001 booklet “Journey into Foundational Health” falsely stated that silver (one of the product’s ingredients) “has been used successfully in the treatment of over 650 diseases.” In 2002, after the Food and Drug Administration issued a warning letter, some claims on the company’s Web site were toned down.
The March 2004 consent order barred Seasilver USA, Inc.; Americaloe, Inc.; Bela Berkes; and the company’s Chief Executive Officer Jason Berkes, Bela’s son, from making false or misleading claims about Seasilver in the future. The defendants were required to pay $3 million in consumer redress. The settlement included a suspended judgment of $120 million, which would become due if the defendants misrepresent their financial status or fail to make the payments as they agreed.
In its petition to court, the FTC contended that the defendants to date have paid less than $1 million toward consumer redress. Under the court’s current order, the defendants now are jointly and severally liable for the full amount of $119,237,000, plus interest. The FTC has secured liens on the defendants’ assets, including a nursery, an aloe farm, and equipment.
Significance: The FTC routinely includes a suspended judgment in its settlement agreements with defendants, due if the defendants misrepresent their financial status or default on the payments they have agreed to make. A suspended judgment is not a throwaway; as this action demonstrates, the agency will enforce a suspended judgment when the opportunity calls for it.
In the wake of Google’s $90 million settlement of a click fraud lawsuit by online advertisers, several search giants have joined forces with two media industry associations to standardize how click fraud is measured and reported.
Click fraud occurs when Web site publishers click on ads on their own site to boost their revenue or when companies click on rivals’ ads to eat away at their competitors’ advertising budgets.
The Interactive Advertising Bureau and the nonprofit Media Rating Council are forming the Click Measurement Working Group to draw up a set of guidelines that will define what constitutes a “click” and determine the standard against which clicks—fraudulent or legit—are measured. Member companies of the working group so far include Google, Yahoo, Microsoft, Ask.com, and LookSmart. The first three represent 94.5 percent of all search traffic, according to Hitwise.
According to the IAB, the guidelines will help online advertisers get a better understanding of the prevalence of click fraud.
Google also recently changed its AdWords product to provide online advertisers with data on the number of invalid clicks on their ads. Invalid clicks, for which Google does not charge advertisers, include fraudulent and inadvertent double clicks on an ad. Without relevant click fraud data from Google, advertisers have had to rely on estimates from third-party companies that provide services to combat click fraud. However, Google believes these companies inflate numbers to drive more business. Under the new system, AdWords customers will be able to see data on invalid clicks on a daily basis or beyond, going back to the beginning of the year. Google says it has had to limit the data it provides to prevent fraudsters from reverse engineering its systems and methods of operation.
As reported in the August 2, 2006, issue of AdvertisingLaw@manatt, a report submitted in a court case last month concluded that Google’s anti-click fraud efforts are “reasonable.” Last week, a judge approved the $90 million settlement of that lawsuit, brought on behalf of a group of advertisers unhappy with Google’s click fraud efforts. The judge rejected challenges by advertisers who argued that the amount is inadequate compensation.
Industry reports say fraudulent clicks range from around 14 to 20 percent of total clicks, but true figures have been difficult to reach because click fraud data is limited. Search engines, meanwhile, have complained that third-party providers of anti-click fraud services and software inflate actual click fraud rates to drum up business.
Significance: Click fraud stands as the single biggest threat to online advertising, scaring away would-be online marketers who are concerned about losing ad dollars to fraud. The recent developments on the click fraud front—the settlement of the lawsuit against Google, the search engine’s new policy of providing advertisers with click fraud data, and the industry-wide initiative to develop guidelines for measuring click fraud—will all help give online marketers a more definite sense of the prevalence of click fraud and the effect it has on their advertising efforts.
CBS asked a federal appeals court on July 28, 2006, to set aside the $550,000 fine by the Federal Communications Commission against the broadcaster for airing Janet Jackson’s breast-baring performance during the 2004 Super Bowl halftime show.
The petition for review was filed in the Third Circuit U.S. Court of Appeals in Philadelphia. The television network argued that the fine was “unconstitutional, contrary to the Communications Act and FCC rules and generally arbitrary, capricious and contrary to law.” CBS agreed to turn over the fine money, a prerequisite for filing the appeal.
CBS noted in a statement that it had apologized for “the inappropriate and unexpected” episode and had put in place safeguards to prevent a recurrence. “However, we disagree strongly with the FCC’s conclusions and will continue to pursue all remedies necessary to affirm our legal rights.”
The FCC said it would fight to uphold the fine.
The halftime show aired on February 1, 2004, to an estimated audience of 90 million. During a musical number, singer Justin Timberlake pulled off part of Jackson’s bustier, briefly exposing one of her breasts. Timberlake described the incident as a “wardrobe malfunction.”
After a flood of complaints, the FCC issued a fine against the network and each of 20 network-owned stations that aired the show, totaling $550,000. The breast-baring episode kicked off a record year for indecency fines imposed by the agency and led Congress to pass a tenfold increase in the maximum fines for indecent broadcasting.
The FCC already was embroiled in court fights over fines it issued on March 15 penalizing foul language in a number of television shows. Several major broadcasters asked federal courts in New York and the District of Columbia to overturn the fines.
Significance: The FCC and broadcasters continue to battle over the agency’s enforcement of indecency standards, which the networks contend are poorly defined and unconstitutionally arbitrary and vague. Despite suggestions from FCC Chairman Kevin Martin that the agency will provide more specific guidelines for what crosses the indecency line, it has yet to issue them. A court ruling invalidating the FCC’s action could propel the agency to produce the promised guidelines, or may cause it to back off altogether. We will keep you posted.
St. Paul Travelers Companies Inc. issued an apology and agreed to pay $77 million in fines and adopt a series of reforms to settle an investigation with the New York State Department of Insurance, New York Attorney General Eliot Spitzer, and the Attorneys General of Illinois and Connecticut.
St. Paul merged with Travelers Property Casualty Corporation in 2003, a year after it was spun out from Citigroup in a $5 billion IPO. The company is a major provider of automobile and homeowners insurance for individuals and commercial insurance for small businesses.
The probes centered on charges of customer steering, bid rigging, and improper finite reinsurance transactions. Spitzer alleged that since at least the mid-1990s, St. Paul, Travelers, and other insurers paid hundreds of millions of dollars in “contingent commissions” to insurance brokers and agents in exchange for business referrals.
In addition, St. Paul Travelers participated in a scheme to fix insurance prices in the excess casualty area. For example, Spitzer cites an e-mail from a broker at Marsh & McLennan Companies to a St. Paul underwriter seeking a phony bid for an insurance contract that was being steered to one of St. Paul’s competitors, Zurich:
“Specs were forwarded in November for [Client C]. Zurich’s renewal quote is $175,000 for [the lead excess layer]. Primary AL is $2MM. Josh is asking for non-quotes. If you didn’t already respond to [the Marsh executive] . . ., please feel free either to decline for class or quote higher (please).”
The next day St. Paul responded by issuing a quote 30 percent higher than Zurich’s bid.
The settlement agreement also details St. Paul’s use of improper “finite reinsurance” to bolster both its own financial results and those of its clients. For example, in the years 1999 through 2002, St. Paul entered into aggregate excess of loss reinsurance contracts with an insurer in Barbados, despite a side agreement that any losses suffered by the insurer would be made up by St. Paul.
In a statement, St. Paul Travelers “acknowledge[d] that certain of its employees violated acceptable business practices and St. Paul Travelers’ own standards of conduct by engaging in improper bidding practices and certain ‘finite insurance’ activities. St. Paul Travelers apologizes and has enacted business practice reforms to ensure that these incidents do not occur again. Further, St. Paul Travelers has agreed to support legislation eliminating contingent compensation for brokers and agents.”
Under the agreement, $37 million will be paid to St. Paul Travelers policyholders harmed by the company’s bid-rigging activities. In addition, St. Paul Travelers will pay penalties of $24 million to New York and $8 million each to Connecticut and Illinois.
Significance: In 2004, Spitzer and the New York Insurance Department announced a joint probe of misconduct in the insurance industry. This investigation has resulted in guilty pleas from 20 insurance company executives and officers to date. The settlement with St. Paul’s Travelers is the largest by far.
A coalition of 14 states and the U.S. Virgin Islands has petitioned the Environmental Protection Agency to require pesticide manufacturers to disclose on product labels all hazardous ingredients.
The EPA now requires that pesticide labels disclose only the product’s “active” ingredients; that is, those toxic materials that are intended to kill insects, weeds, or other target organisms. However, pesticide products also contain many other “inert” ingredients. Although intended to preserve or improve the effectiveness of the active ingredients in particular pesticides, these “inert” ingredients often are toxic themselves, the states contend. Almost 400 chemicals used for this purpose have been found by the EPA or other federal agencies to be hazardous to human health and the environment, but the EPA does not require them to be identified on pesticide labels. Current EPA regulations allow the identity of almost all “inert” ingredients to be omitted from the label based only on their function in the product, not on their health or environmental effects. States are preempted by federal law from requiring additional labeling for pesticides.
The Northwest Coalition for Alternatives to Pesticides and 21 other environmental and public health organizations also filed a similar petition with the EPA.
The petition to the EPA is available on the New York Attorney General’s Web site.
Significance: It does seem like a curious disconnect to require disclosure of ingredients harmful to pests but not those harmful to humans and domestic and wild animals. On the other hand, companies are required to include warnings on the label of a product deemed harmful to humans and non-pest animals, and provide information on proper precautionary handling of the product. Presumably, manufacturers are required to take into account all ingredients, active and inert, when issuing warnings, and the states do not contend otherwise.
Linda A. GoldsteinPartnerEmail212.790.4544
Jeffrey S. EdelsteinPartnerEmail212.790.4533
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