Advertising Law

FTC Reports on Disclosure Workshop

Following its September workshop, the Federal Trade Commission published a report on “Putting Disclosures to the Test.”

Almost 1,000 individuals attended the workshop—225 in person and 735 via webcast—to discuss the effectiveness of disclosures and how to conduct testing to evaluate their effectiveness. Chairwoman Edith Ramirez kicked off the workshop by discussing FTC guidance and enforcement actions related to disclosures, and emphasizing the importance of testing disclosures.

“We aim to highlight the importance of empirical analysis of disclosures and encourage marketers, businesses, and other organizations to test their own disclosures and learn from research,” she told attendees. “Ineffective disclosures can overwhelm, confuse, or even distract consumers from making informed choices.” She encouraged businesses to “pay attention to ensuring that disclosures provide useful information that can translate into consumer action.”

Participants in the discussion noted that disclosures may be delivered offline or online through icons, product labels, short text, long text, audio or video messages, interactive tools, or other media. Disclosures may be necessary to limit or qualify marketing claims to prevent deception, and can also communicate a wide range of other information that consumers need to make informed decisions in the marketplace. Multiple factors impact the effectiveness of disclosures, including whether they contain the most essential information and whether they are noticed by consumers.

Workshop panelists shared various cognitive models and evaluation methods that can be used to assess disclosure effectiveness, including eye tracking studies and post-study questions. Panelists also highlighted common testing problems. For example, one should not assume that an individual who clicks on or observes a disclosure is actually aware of the disclosure or understands its message. Additionally, disclosure testing should not be conducted using populations other than the intended audience of the particular advertising. Also, advertisers should not assume that the results from any prior testing will hold under new circumstances.

A panel devoted to exploring whether and when consumers pay attention to disclosures reported that presenting both audio and text disclosures led to a poorer understanding than presenting a text disclosure by itself. The panel recommended that the most important and likely to be novel information be placed up front. Panelists also noted the importance of using multiple testing methods to evaluate disclosures.

Regarding the evaluation of how well consumers comprehended disclosures, the discussions emphasized that study participants should be asked to perform some analysis that can be measured for accuracy. Panelists also highlighted the effectiveness of lower-cost testing approaches, including new approaches to eye tracking and crowdsourcing platforms. Surveys, online experiments, observational studies, and field experiments can all evaluate the impact that disclosures have on consumers’ decision-making and behavior, panelists said.

In considering the future of disclosures, attendees debated use of an app that would learn to predict the types of permissions a user would allow based on prior responses to disclosures. While arguably more efficient, the app presented some legal and ethical issues, including how to address incorrect predictions made by the app.

To read the FTC’s staff summary, click here.

Why it matters: Based on workshop input, the staff summary concluded that disclosure evaluation is a topic of broad interest that includes a large number of disciplines. A variety of methodologies exist to test disclosure effectiveness, and panelists shared a number of ways to improve disclosure design. There may also soon be an app for disclosures, which could reduce the burden on consumers.

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Smart Thermostat Claims Survive NAD Scrutiny

Nest Labs can support advertising claims that appeared in a New York Times print ad for its smart thermostat product, the National Advertising Division recently determined.

An advertisement in The New York Times promoting Nest Labs’ Learning Thermostat made the following claims: “Nest Learning Thermostats have saved 7.3 billion kilowatt-hours of energy,” “What if everybody in America had a Nest Learning Thermostat? We’d save enough energy to light up each house in this country for a year. Enough to take dozens of power plants off the grid,” and “When people save energy with the Nest Thermostat, a tiny leaf appears. They see it and think they’re lowering their energy bills, saving a few bucks. And they are. But they’re also saving something bigger.”

As part of its routine monitoring program, the NAD requested substantiation for the claims. The self-regulatory body also expressed concern about implied claims that the thermostat provides a general environmental benefit as well as an energy-efficient or energy-saving benefit.

Nest Labs provided evidence in the form of three studies. One was an internal observational study that analyzed the energy bills and energy savings of Nest customers, and was conducted using industry standard practices as defined by the U.S. Department of Energy. According to the advertiser, the study showed that Nest Labs customers saved, on average, about 10 percent on heating use and 17 percent on cooling use, which translated into a savings of between $131 and $145 annually.

Two additional studies—one performed by the Energy Trust of Oregon and the other by an Indiana gas and electric company—revealed similar results for local energy use

The advertiser also explained how it arrived at the kilowatt-hours energy-savings number and how houses were powered in the country. Considering the data from the studies, Nest Labs took the total runtime of the thermostats, converted those measures to kilowatts, and computed the total energy-savings figure.

As for the “saving something bigger” language, Nest Labs argued that it was accurate because Learning Thermostat users save money and resources based on the energy-savings benefits the product provides. Nest Labs also argued that no general environmental claims were implied by the ad because the advertising only communicated a specific energy savings benefit.

The NAD agreed. The three studies provided competent and reliable scientific evidence to substantiate the claims, and were conducted with appropriate methodologies and analyses. Further, the data the advertiser used to support its claims was reasonable. Its claims that the product would “light up each house in this country” and “take dozens of power plants off the grid” were truthful and accurate.

“NAD also determined that telling consumers that they are ‘saving something bigger’ communicated the truthful message that in addition to saving money, consumers are conserving natural, non-renewable resources (like petroleum and coal) that would otherwise be expended to generate additional electricity and gas,” the self-regulatory body wrote. “Thus, NAD determined that the advertiser provided a reasonable basis for this claim.”

Finally, the NAD noted that its concerns about implied claims had been laid to rest after reviewing Nest Labs’ claims in the context of the advertising as a whole. “NAD determined that the advertisement does not reasonably convey an unqualified general environmental benefit message,” according to the decision. “Rather, the advertisement conveyed a limited series of discrete energy savings messages that were supported by the evidence in the record.”

To read the NAD’s press release about the case, click here.

Why it matters: The NAD and the Federal Trade Commission have made clear that environmental claims must be promoted in a responsible manner because consumers cannot typically verify themselves the truth of such claims. As this decision underscores, advertisers should take special care to comply with the FTC’s Green Guides, which caution advertisers against making unqualified general environmental benefit claims because “it is highly unlikely that marketers can substantiate all reasonable interpretations of these claims.” The FTC suggests that “To avoid deception, marketers should use clear and prominent qualifying language that limits the claim to a specific benefit” and that the overall context of the advertisement does not imply an unsupported general environmental benefit message. Because Nest Labs conveyed “a limited series of discrete energy savings messages,” the advertiser survived NAD scrutiny.

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Consumer Groups, Lawmaker Express Concern Over “Spy Toys”

Toys that purportedly spy on children are the subject of a new complaint filed with the Federal Trade Commission. Senator Ed Markey (D-Mass.) also sent letters to the manufacturer of the My Friend Cayla doll and I-Que Intelligent Robot.

According to the Electronic Privacy Information Center, the Campaign for a Commercial Free Childhood, the Center for Digital Democracy, and Consumers Union, the My Friend Cayla doll and i-Que Intelligent Robot Genesis toys violate the Children’s Online Privacy Protection Act.

“This complaint concerns toys that spy,” the consumer groups wrote. “By purpose and design, these toys record and collect the private conversations of young children without any limitations on collection, use, or disclosure of this personal information. The toys subject young children to ongoing surveillance and are deployed in homes across the United States without any meaningful data protection standards. They pose an imminent threat to the safety and security of children in the United States.”

Both toys contain a Bluetooth microphone and speaker with a companion mobile application. Before playing with the toys, users are required to download the app to connect the doll and grant the manufacturers permission to access the hardware, storage, microphone, WiFi connections, and Bluetooth on devices for Cayla. Once the devices are activated, the toys convert a child’s statements into text, which is then used by the app to retrieve answers to questions and appropriate responses to comment.

In so doing, Genesis—and Nuance Communications, the software provider for the toys—record and collect children’s voices and speech using voice-recognition technology in violation of COPPA, the groups said. The companies fail to provide adequate notice to parents of their terms of service and privacy policy. The notice is “confusing and hard to access,” it is displayed in small font, and appears only after 3,800 words have already been presented.

The complaint adds that Genesis fails to obtain verifiable parental consent because the company assumes that downloading the app constitutes acceptance of its terms.

Genesis further neglects to comply with deletion and data retention requirements and keeps data for “vague and potentially indefinite periods of time,” the groups told the FTC. The company also fails to employ security measures to prevent unauthorized access to personal information collected from children via the toys. Finally, the toys also feature undisclosed product placements and Cayla is preprogrammed with “dozens of phrases” referencing Disneyworld and Disney movies. Cayla also tells children that her favorite movie is The Little Mermaid, for example, and that her favorite song is “Let It Go.”

For all of these purported COPPA violations, the complaint requests that the agency investigate Genesis and Nuance, halt any illegal practices, and provide appropriate relief.

Sen. Edward Markey (D-Mass.), who authorized COPPA when he was in the House of Representatives, sent letters communicating his own concerns to the general manager of Genesis and the chairman of Nuance. Sen. Markey’s letters inquire “about the privacy and security of children’s voice recordings collected by Genesis Toys’ dolls.” The identical letters ask the companies to identify information collected about children 12 years old and younger and, for each type of information, to explain how it is stored, how long it is stored, and any purposes for which the data is kept.

Sen. Markey also queried whether the collected information is necessary to make the toys function, whether the companies collect information about children from other sources (such as social media), and whether the companies notify parents about the data collected by the toys.

Sen. Markey’s letters also inquired whether the companies use the toys to send advertising to children, and if so, to identify all companies on behalf of which the advertising is delivered. The letters also asked the companies, “Do you notify parents that their children may receive advertisements through the toys? If yes, how? If no, why not?”

“Given the sensitive nature of children’s recorded speech, I believe that Genesis Toys and Nuance must take responsible steps to protect children’s privacy and comply with the Children’s Online Privacy Protection Act (COPPA),” Sen. Markey wrote.

To read the consumer groups’ complaint to the FTC, click here.

To read Sen. Markey’s letter to Genesis, click here.

To read Sen. Markey’s letter to Nuance, click here.

Why it matters: The groups said the complaint—filed in conjunction with consumer protection organizations in countries around the globe, including Belgium, France, Ireland, the Netherlands, and Norway—is a warning shot to all “smart” products. The groups are “worried about the lack of consumer and data protection for children in the rapidly emerging Internet of Things,” Jeffrey Chester, executive director of the CDD, said in a statement. “The industry must adopt safe practices.”

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Paid Reviews Cost Companies $175,000, Enforcement Action

Two companies have settled with the New York Attorney General’s Office after being accused of paying consumers for positive reviews by agreeing to increase their transparency and pay a total of $175,000.

MedRite Care, LLC, a medical emergency care service, paid thousands of dollars to Internet advertising companies and freelance writers over a two-year period for posting positive reviews of the company on sites like Yelp. The reviewers neither visited MedRite facilities nor experienced its services, the AG said, and never disclosed they were paid for the reviews.

In September 2012 the company paid $375 for 15 positive reviews on sites such as Yahoo Local Page, and followed with job postings on Craigslist offering $10-$15 for positive reviews on Yelp. When Yelp discovered that MedRite was using the site to solicit reviews (one e-mail to a Yelp member read, “I see you are yelping a lot. I own a company in nyc and would like to get more reviews ... would you come checkout our company and write a review? (will pay).”), Yelp posted a “Consumer Alert” on MedRite’s Yelp profile.

Similarly, car service company Carmel provided a $10 discount to clients who posted a positive review online. Between May 5, 2016 and July 27, 2016, the company sent 161,000 e-mail messages to customers requesting feedback about their experience. Customers were presented with three choices to describe their service: “Perfect,” “Good,” or “Bad.” Those who clicked the first two options were directed to a consumer review website and provided with a $10 discount off their next ride with Carmel upon confirmation of the review. Those who chose the “Bad” option were not connected with a review website or rewarded with a discount, the AG said.

The companies violated both the Federal Trade Commission’s Endorsement Guides and New York state law, which prohibits misrepresentation and deceptive acts or practices in the conduct of any business, according to Attorney General Eric T. Schneiderman.

The companies will pay $100,000 and $75,000, respectively (although MedRite’s fine was partially suspended to $50,000 based on inability to pay), and will no longer engage in such practices. MedRite is prohibited from misrepresenting that an endorser is an independent user of its services or compensating a reviewer who has not made the required disclosures. Carmel also promised to educate the for-hire car transportation industry on false advertising law and online consumer reviews by taking out a full-page ad in trade newspapers and conducting educational seminars.

To read the AG’s Office’s press release about the settlements, click here.

Why it matters: These actions are a continuation of the AG’s efforts to ensure accurate and reliable consumer reviews, an effort that began with “Operation Clean Turf” in 2013, the AG’s Office said in a statement. “Consumers should not be misled when it comes to making important determinations about their health and well-being,” Attorney General Eric T. Schneiderman said in a statement. “Our investigation into MedRite sends a strong message to companies that the rules preventing deceptive advertising and practices must be upheld online. Those same rules apply to other service industries.”

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News and Views

Linda Goldstein, chair of Manatt's advertising, marketing and media practice, recently spoke with Response Magazine on the latest advertising and privacy developments and trends in the consumer electronics (CE) market. "Augmented reality, like standard video today, is going to become a key component of a lot of marketing," Goldstein said. To read the full article, "Consumer Electronics Market: A Space Odyssey," click here.

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