Advertising Law

Wilson Co-Chairs Inaugural Cyber Boot Camp, Jan. 12

Donna Wilson, partner and chair of Manatt's privacy and data security practice, will co-chair the Inaugural Cyber Boot Camp hosted by the Daily Journal. The event will focus on the latest happenings in cybersecurity and discuss practical ways to keep all types of data safe from attack.

Donna will moderate a panel on litigation trends titled "Chickens Coming Home to Roost: B2B, Enforcement, Class Action, and Card Brand Disputes in the Wake of an Incident, and Using Litigation Against the Bad Guys." Her panel will discuss how to navigate risks in the face of a data breach incident, as well as ways litigation can be used to fight back against bad actors threatening an organization. Cyber Boot Camp will take place on January 12, 2017, in Los Angeles. Click here for more information.

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SPECIAL FOCUS: The FTC Watches Smart TV

By Richard Lawson

In older, simpler times, families would gather together and watch the TV. A key takeaway from last week's Federal Trade Commission Fall Technology seminar is that now TV will also be watching the family.

Last week the FTC held a half-day panel discussion bringing together industry representatives, academics, and consumer advocates to discuss one of the new frontiers of the Internet of Things (IoT)—the Smart TV. The discussion was dominated by the tensions between the virtues and vices of tracking, and as so often happens with privacy discussions, it devolved into a dissection of the efficacy of the notice and choice regime for consumer privacy. The big lesson for marketers is that Smart TVs have the ability to allow for household-specific targeted marketing. The big question raised by the seminar is whether consumers receive adequate notice of TV tracking, a question made all the more interesting since the Trump Administration will make appointments to the Federal Communications Commission and FTC.

The core areas of Smart TV tracking center on delivery standards, product improvement, measurement and ratings, advertising, and cross-device tracking. In the first two, the TV sends signals back for maintenance and product monitoring purposes. Measurement, ratings, and device tracking (for example, allowing for a seamless transition from a tablet to a TV) involve collecting data to create a detailed household profile, which in turn allows for ads to be targeted to specific households.

Panelists noted that the tracking of viewer habits allowed for the development of content. The revivals of Gilmore Girls, The Mindy Project, and Arrested Development are examples of how consumers benefit from increased tracking. In addition, consumer viewing habits can be accurately tracked to determine just how broad—and engaged—the audience is, which benefits both marketers and content developers. For example, some studies have concluded that as much as 25% of a program's audience is watching on an app and most of the audience is not watching live. Panelists also noted that there were consumer benefits to marketing, as traditional survey data—based on small population samples—could miss entire demographics. With a larger pool of data on users, more relevant ads can be served.

As with other aspects of IoT, security is an issue. Concerns were raised about the likelihood that devices could be hacked and unauthorized third parties could monitor a household's habits. As was witnessed several weeks ago, IoT devices can be used in denial of service attacks, and this is no less a concern with Smart TVs. Issues about the frequency of security updates from manufacturers as well as how long manufacturers will support devices to ensure up-to-date security standards have been raised.

In addition to security, notice to the consumer is a major concern. The FTC noted that in the TVs it studied, the devices had their privacy settings defaulted to a consumer-friendly standard, but the clarity of the notice provisions varied greatly. The FTC noticed, however, that data collected by the TV appeared to be encrypted prior to any transmission.

The most spirited part of the panel centered on the effectiveness of the notice and choice regime when it comes to consumer privacy. One panelist cited the frequently repeated adage in all privacy discussions that "if you're not paying for the product, you are the product." While it was noted that industry takes care to separate personally identifiable information from viewing data and uses anonymous and random ID numbers for marketing purposes, a number of the consumer advocate panelists stated that claims of anonymous tracking with household-specific targeting were logically inconsistent. Their views track a frequently cited concern about privacy; namely, is there a point where data can be both useful to a marketer yet incapable of being de-anonymized? As some studies have shown, the chances are greater than 80% that the person can be identified if his/her date of birth, gender, and ZIP code are known.

Regardless of the practices that manufacturers or content providers may employ, panelists noted that consumer perception and understanding of privacy are out of sync with the way data is collected and used. For example, one panelist noted that although most consumers believed that privacy laws address most aspects of data sharing and collecting, some studies show they generally do not truly understand data policies. As applied to Smart TVs, some evidence suggests that consumers do not understand that the device tracks what the viewer sees on the TV—regardless of whether the content is broadcast through a traditional channel or watched on a DVD player. The panel also noted that 72% of consumers believe that extensive personal data can be used against them. Consumers are informed of Smart TV's data collection practices at the time they activate the device. One panelist noted, however, that for companies that have operations in multiple countries, the privacy standards used for all consumer data will often be the jurisdiction with the strictest privacy standards—not surprisingly, this often turns out to be the EU.

The panel's views were, in large part, a continuation of the privacy debates that have run parallel to the growth of the digital age. In Web 1.0 we saw debates over tracking of browser history, and in Web 2.0 we saw debates over the monitoring of the trove of data divulged via social media. Now, with the IoT, we are seeing the debate move to consumer awareness over what devices are tracking them, and how. In many ways this panel discussion demonstrated just how the old wine of the notice and choice privacy standards will be poured into the new bottles of TVs that monitor a user's watching habits. We can expect this conversation will be repeated when our food comes in digitally connected boxes that connect to your phone and simultaneously suggest what you can have for dinner, while providing enough data for marketers and financial institutions to determine how healthy you are. The upsides (relevant ads delivered to specific homes watching content that only massive data could have predicted would have an audience) and downsides (consumer ignorance as to the extremely detailed portrait of the interests and habits that can be developed) for the IoT were on full display last week. With numerous vacancies on the FTC and several expected at the FCC in short order, the Trump Administration will put its fingerprints on these issues very soon.

Companies that have an interest in the issue should note that the FTC will accept comments until January 6, 2017.

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NAD Down on Lowe's "Up To" Sales Claims

Making a statement about "up to" claims, the National Advertising Division recommended that Lowe's discontinue using the savings claim "Up to 20% Off Appliances $396 or More."

A consumer tipped off the self-regulatory body about the claim and complained that while it implied that all appliances would be discounted, a hard-to-read footnote excluded virtually all the popular major brands of appliances. The footnote listed various appliance brands followed by "brands limited to a maximum 10% discount, unless otherwise shown." This hidden limitation rendered the claim a "bait and switch" advertisement, the consumer said.

The NAD reviewed its position on "up to" claims in light of a Federal Trade Commission ruling that such claims "require that the maximum level of performance claimed can be achieved by an appreciable number of consumers under circumstances normally and expectably encountered by consumers."

In addition, the NAD has also established in prior decisions that for "up to" savings claims, the number of sales at the maximum savings should comprise a "significant percentage" of all items in the offering and that to support such a claim an advertiser must offer at least 10 percent of the inventory included in the offer at the maximum advertised savings.

Applying these standards, the decision found the record unclear as to whether Lowe's claim applied to a significant percentage or meaningful number of offerings, particularly given the exclusion of "almost every major brand."

The NAD also found the advertiser failed to adequately disclose the limitations of the offer, as the terms were not "clear and conspicuous," a standard defined as disclosures "displayed in a manner that is readily noticeable, readable, and/or audible, and understandable to the audience to whom it is directed," considering factors such as "the size of the font, the duration that the super appears on screen, the extent to which it contrasts with the background, as well as surrounding visuals and sounds that may distract a viewer's attention away from the super."

"Here at the same time that the Lowe's disclaimer appears fleetingly, in a small font at the bottom of the screen, prominent graphic elements (images of appliances) also appear in the middle of the screen," the NAD wrote. "The viewer's eye is naturally drawn to the more prominent graphics and thus, it is likely that consumers' attention would be drawn away from the disclosure."

For all of these reasons, the self-regulatory body recommended that Lowe's discontinue the challenged claim. As for future advertisements, the company should "obtain appropriate substantiation demonstrating that its 'up to' claims apply to a significant percentage or meaningful number of offerings before publishing the offer," the NAD advised. It further recommended "that any disclaimer which contains material terms and conditions of the offer (e.g., including the fact that major brands are excluded) should be sufficiently clear and conspicuous and appear in immediate proximity to the triggering claim so that consumers are likely to notice, read and understand it."

Lowe's agreed to comply with the NAD's recommendations.

Why it matters: The decision offers a valuable primer on the necessary support for "up to" savings claims, including that "the maximum level of performance claimed can be achieved by an appreciable number of consumers under circumstances normally and expectably encountered by consumers." Advertisers should also note the NAD's reminder that regardless of format they must be "clear and conspicuous" and "displayed in a manner that is readily noticeable, readable and/or audible, and understandable to the audience to whom it is directed."

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Online Influencers Called Out in Second Letter to FTC

Reiterating their concerns about online influencers, Public Citizen and three other consumer groups sent a second letter to the Federal Trade Commission requesting that the agency take action.

"Undisclosed paid product endorsements continue to persist as a serious problem on Instagram, and the [FTC] has yet to take action to enforce its policy, which states that paid endorsements should be identified with #advertisement or #ad," the groups wrote.

Public Citizen, Commercial Alert, the Center for Digital Democracy, and the Campaign for a Commercial-Free Childhood first wrote to the Commission in September and provided more than 100 examples of posts they claimed violated FTC policy, including some from well-known celebrities such as Rihanna and members of the Kardashian family.

In the most recent letter, the groups provided additional examples of undisclosed influencer posts on Instagram, and also identified a new area of concern for the FTC, so-called "micro-influencers."

Influencers with small followings and lesser-known celebrities are dominating the influencer market on social media, according to the letter, with a cottage industry developing to connect brands with average Instagram users. Two Web sites—Influenster and Bzzagent—send users free products in exchange for reviews and social media posts, the groups said.

When users receive a free sample, they are encouraged to post a photo to advertise the product to their friends and followers. The more promotional posts made by a user, the more free products they receive. But the companies fail to comply with FTC regulations, the groups told the agency. Bzzagent specifically instructs influencers not to post the correct disclaimers and use "GotItFree" or "GotACoupon."

"Undisclosed paid endorsements from average consumers represents a dangerous trend that the FTC must address, since people generally place more trust in recommendations made by their peers and have no reason to believe that their friends, colleagues and family are engaging in paid product promotion," the letter stated. "Thus, companies are preying off of the trust and relatability of smaller level influencers. We encourage the FTC to investigate Influenster and Bzzagent's disclosure policies and communication practices with influencers."

To read the letter from the groups to the FTC, click here.

Why it matters: The issue of which disclosures are necessary for certain posts by online influencers is not going away anytime soon. Social media advertising only continues to grow, while consumer groups have made it clear they will not drop the issue. "We again request that the FTC engage in an affirmative effort to change the culture around paid endorsements on Instagram, and that it act promptly and aggressively," the groups wrote in their most recent letter. "Enforcement actions should be taken against serial offenders, marketing agencies and endorsers that continue to violate FTC policy."

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Consumer Review Fairness Act Set to Become Law

Congress passed the Consumer Review Fairness Act and sent the bill that permits consumers to post negative reviews to President Barack Obama for a signature.

The Senate passed the measure by unanimous consent after the House voted in favor earlier this year.

In addition to prohibiting companies from using a contract provision to restrict consumers' ability to post critiques, the bill also prevents companies from asserting a copyright interest in the reviews. Both the Federal Trade Commission and state Attorneys General were given enforcement power under the new Act, which mirrors similar legislation enacted in California.

That law was the result of a highly publicized dispute between KlearGear and a married couple who posted a negative review about the online retailer. Claiming the couple violated a non-disparagement clause in its terms of service, KlearGear sent the couple a bill for $3,500. The couple refused to pay and later claimed in a lawsuit that their credit was damaged as a result. A federal court judge ordered KlearGear to pay the couple $306,750 in 2015.

The story made headlines, and as consumers learned about the existence of such clauses—which also triggered litigation involving a pet care company and a dentist who were unhappy about negative reviews—lawmakers sprang into action. "By ending gag clauses, this legislation supports consumer rights and the integrity of critical feedback about products and services sold online," Chairman of the Commerce Committee John Thune (R-S.D.) said in a statement after the bill's passage.

To read the Consumer Review Fairness Act, click here.

Why it matters: With a signature from President Obama likely before he leaves office in January, companies should review their consumer contracts to remove or amend any non-disparagement or copyright ownership clauses.

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FTC Reports on "Sharing Economy"

A new staff report from the Federal Trade Commission highlights the competitive benefits and the potential consumer protection issues presented by the burgeoning "sharing economy."

Based on a workshop hosted by the agency in June 2015 (as well as more than 2,000 comments), the report "provides an in-depth assessment of evolving business models that rely on Internet and app-based 'sharing economy' platforms used by millions of Americans," the FTC said. The report, titled "The 'Sharing' Economy: Issues Facing Platforms, Participants, and Regulators," discusses the "meteoric rise" of peer-to-peer platforms, which have altered the landscape of certain industries, particularly for-hire transportation and short-term lodging.

The report identified three characteristics of a successful platform marketplace: it has the ability to attract a large number of participants to both sides of the market (described by workshop participants as a "thick" market); the ability for potential transaction partners to search for one another, find a match, and complete a transaction (reducing the friction that would otherwise make transactions costly or cumbersome); and it has a way to make transactions between strangers safe and reliable enough that buyers and sellers feel confident that the deal will proceed as agreed.

Trust mechanisms are a key ingredient of the sharing economy, the FTC wrote. It analyzed how particular platforms employ trust mechanisms and work to promote buyer and seller satisfaction. While some have expressed concern that the platforms attract low-quality sellers with the possibility that they have no investment in establishing a business reputation, these potential problems have not stopped the economy from prospering.

Instead, platforms have developed tools to address these issues, most notably in the form of reputation ratings systems. Although the ratings "do not eliminate buyer or seller dissatisfaction, they work well enough to have facilitated the enormous growth of the sharing economy," the report recognized. Workshop participants shared ideas about ways of improving reputation ratings, such as reporting a user's percentile ranking alongside his or her aggregate score or weighing recent transactions more heavily than older ones.

The report also addressed the debate surrounding regulation of the sharing economy. "On the one hand, regulatory measures may be needed to protect consumers, promote public safety, and meet other legitimate governmental goals," the FTC said. "On the other hand, regulation can chill incentives for innovation by increasing costs and decreasing potential returns, thereby impeding or preventing new entry and depriving consumers of the benefits of new product and service offerings."

Workshop attendees offered a range of opinions on the issue, from requiring sharing economy participants to be subject to the same regulations as traditional products and services, to regulations tailored to the new platforms, to a completely hands-off approach. Concrete examples of the dilemma were discussed by considering the hugely successful platforms of Uber and Airbnb (valued at $62.5 billion and $25.5 billion, respectively).

To read the FTC's staff report, click here.

Why it matters: "It is important to allow competition and innovation to continue to flourish, while at the same time ensuring that consumers using these online and app-enabled platforms are adequately protected," FTC Chairwoman Edith Ramirez said in a statement about the report.

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News and Views

As we prepare to ring in the new year, it may be a good time for brand marketers, agencies and other social influencer networks to take a fresh look at their policies and procedures for engaging social influencers. Linda Goldstein, chair of Manatt's advertising, marketing and media practice and co-chair of the Word of Mouth Marketing Association's Ethics & Legal Council, recently penned a blog post for WOMMA addressing the impact of petitions filed by consumer watchdog groups who are urging the FTC to take aggressive action against various types of influencer campaigns. Goldstein also offers tips on how to avoid regulatory scrutiny. To read the full post, "The Watchdogs May Be Watching You!" click here.

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