Advertising Law

Manatt Attorneys Tapped for 38th BAA Marketing Law Conference

Linda Goldstein, Marc Roth and Richard Lawson are featured speakers at the Brand Activation Association’s upcoming 38th annual Marketing Law Conference.

Linda Goldstein, chair of Manatt’s advertising, marketing and media practice, will share insights on the key issues and developments in her annual Year in Review. Marc Roth, co-chair of the firm’s TCPA compliance and class action defense practice, will moderate a panel on issues surrounding mobile marketing, and Richard Lawson, partner in Manatt’s consumer protection practice, will join directors from the Florida and California Offices of the Attorneys General and the Deputy Chief of Consumer Protection of the Texas Attorney General’s office. Lawson’s session is titled, “State A.G. Policy Enforcement Priorities in Consumer Protection—An Inside and Outside Look.”

The conference will be held on November 9-11, 2016 at the Downtown Chicago Marriott. For more information, click here.

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No Shades of Gray in Order Banning Supplement Claims

In a case based on a referral from the National Advertising Division, the Federal Trade Commission obtained summary judgment and a final order against an advertiser that claimed its dietary supplement could reverse or prevent gray hair.

In May 2015, the agency filed a complaint in Wyoming federal court against COORGA Nutraceuticals and Garfield Coore, the company’s executive vice president and sole employee, alleging that they violated Section 5 of the Federal Trade Commission Act by making unsubstantiated claims about the effectiveness of a dietary supplement.

Marketing materials claimed that “Grey Defence is based on new breakthroughs in the understanding of greying,” “Grey Defence is an amazing product designed to slow, stop and reverse the signs of greying,” “Grey Defence is an effective enzyme replacement therapy for greying,” and “Grey Defence uses advance time release technology for enhanced intestinal track absorption.”

In support of the claims, the defendants relied upon an “observational study” of supplement users, which stated that 65 percent of customers reversed their grey and that “the longer customers used Grey Defence the greater the amount of reversal.” COORGA Nutraceuticals and Coore charged $69.99 for a single bottle or $1,279.99 for a pack of 24 bottles.

U.S. District Court Judge Scott W. Skavdahl granted the agency’s motion for summary judgment in August, finding that “there can be little doubt Defendants made material misrepresentations.”

The defendants had no reliable scientific evidence to back up the product claims, the claims that the dietary supplements efficacy was scientifically proven were false, and the observational study was not well designed or scientifically controlled, the court said. As for Coore, he either knew, or was recklessly indifferent about the misrepresentations, as he oversaw and directed every aspect of the company’s business.

Based on that ruling, the court subsequently entered an order banning the defendants from making gray hair-reversal or prevention claims and other health claims unless those claims are not misleading and are supported by reliable scientific evidence. In addition, the defendants must pay $391,335.

To read the complaint, summary judgment order and final judgment in FTC v. COORGA Nutraceuticals, click here.

Why it matters: “If a company says a product can get rid of gray hair or have some other miraculous result, they need the science to support that,” Jessica Rich, Director of the FTC’s Bureau of Consumer Protection, said in a statement. “We’re pleased that the court agreed with the Commission that strong product claims require strong evidence backing them up.” Similar suits against two other marketers ended in settlements last year, which prohibited those defendants from representing that their products reverse or prevent the formation of gray hair, and which banned them from making claims about the health benefits, performance, or efficacy of other dietary supplements, food, drug, or cosmetics absent competent and reliable scientific evidence.

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Senators Demand Answers From Yahoo on Breach Notification Delay

Lawmakers are unhappy with Yahoo’s two-year wait to disclose a breach that compromised the information of an estimated 500 million users.

In a letter to company CEO Marissa Mayer, Sens. Patrick Leahy (D-Vt.), Ed Markey (D-Mass.), Elizabeth Warren (D-Mass.), Ron Wyden (D-Ore.), and Al Franken (D-Minn.) demanded an explanation. “Consumers put their trust in companies when they share personal and sensitive information with them, and they expect all possible steps be taken to protect that information,” the legislators wrote.

Yahoo revealed in late September that, in 2014, hackers may have obtained email addresses, telephone numbers, security questions, birthdates, and encrypted passwords associated with up to 500 million Yahoo accounts. The company’s chief information security officer said Yahoo believes a “state-sponsored actor” bears responsibility for the breach.

While the fact of the breach was troubling, the Senators found the delay in notification even more disturbing. “That means millions of Americans’ data may have been compromised for two years,” the legislators wrote. “This is unacceptable.”

To better understand what went wrong and how Yahoo intends to safeguard data and protect its users in the future, the lawmakers requested answers, beginning with a timeline detailing the nature of the breach, when and how it was discovered, when Yahoo notified law enforcement or other government authorities, and when the company notified its customers. Referencing press reports that the breach was not discovered until August of this year—despite taking place in 2014—the Senators asked how such a large intrusion of the company’s systems could have gone undetected.

The letter also sought details on the exact number of users that are affected and what protection Yahoo is providing to those whose identities and personal information have been compromised.

Looking forward, the legislators wondered, “What is Yahoo doing to prevent another breach in the future? Has Yahoo changed its security protocols, and in what manner?” The letter also queried whether anyone in the U.S. government warned Yahoo of a possible hacking attempt and, if so, when the warning was issued.

To read the Senators’ letter to Yahoo, click here.

Why it matters: The letter from the lawmakers is just one piece of the puzzle for Yahoo in the wake of the data breach revelation. Other legislators are suggesting that the company breached its obligations to investors by failing to disclose the breach in a timely fashion. They requested an investigation by the Securities and Exchange Commission. In addition, two other putative class actions have already been filed against Yahoo in California and Illinois federal courts, one accusing the company of gross negligence and another citing violations of California’s Unfair Competition Law and Consumer Legal Remedies Act.

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Second Circuit Affirms Liability for Manager of Affiliate Marketers

The Second Circuit Court of Appeals agreed with the Federal Trade Commission that a company that managed a network of affiliate marketers could be liable for fake news sites that deceptively promoted weight loss products, even though the company did not create the sites.

Until it ceased operations in 2011, LeadClick operated an affiliate marketing network to provide Internet advertising. The company arranged for advertising for its merchant clients by connecting them to affiliated third-party publishers (affiliates) who advertised the merchant’s products.

LeadClick began working with LeanSpa in 2010. The parties agreed that LeanSpa would pay LeadClick between $35 and $45 each time a publisher’s ad directed an online customer to LeanSpa’s landing page and the consumer enrolled in LeanSpa’s free trial program. As the relationship progressed, LeanSpa became LeadClick’s top customer, with bills totaling $22 million over the course of their contractual agreement.

According to the FTC, however, most of that money was a result of deceptive marketing. LeadClick affiliates used fake news sites to market the LeanSpa products, and both companies were named in an agency lawsuit alleging violations of Section 5 of the Federal Trade Commission Act. LeanSpa settled with the Commission, and a district court judge granted summary judgment in favor of the FTC in the case against LeadClick.

The company appealed to the Second Circuit Court of Appeals, arguing that it could not be liable because it did not create the fake news sites to advertise products itself—instead, the affiliate marketers created the content. The federal appellate panel was not persuaded.

“While LeadClick did not itself create fake news sites to advertise products … it (1) knew that fake news sites were common in the affiliate marketing industry and that some of its affiliates were using fake news sites, (2) approved of the use of these sites, and, (3) on occasion, provided affiliates with content to use on their fake news pages,” the court wrote.

The panel cited testimony from LeadClick employees that fake news sites were “fairly common” and “everyone was using ’em.” The company knew that its own affiliates’ used such sites, with one employee creating a “scouting report” consisting exclusively of fake news sites, while continuing to pay its affiliate marketers for advertising the LeanSpa products.

LeadClick employees affirmatively approved of the use of fake news sites, the court said. In addition, LeadClick’s standard contract with affiliate marketers required them to submit their proposed marketing pages for approval before they were used. The defendant also requested edits to the content of some of the affiliates’ fake news sites.

The panel emphasized that its ruling was not based on a theory that LeadClick aided and abetted the deceptive practices of LeanSpa and the affiliate marketers. It was wholly based on LeadClick’s own actions. “[U]nder the FTC Act, a defendant may be held liable for engaging in deceptive practices or acts if, with knowledge of the deception, it either directly participates in a deceptive scheme or has the authority to control the deceptive content at issue,” the Second Circuit wrote, citing support from the Ninth and Eleventh Circuits.

“LeadClick knew that deceptive false news sites were prevalent in its affiliate marketing network, directly participated in the deception, and had the authority to control the deceptive content of these fake news sites, but allowed the deceptive content to be used in LeanSpa advertisements on its network,” the panel said. “Accordingly, LeadClick is liable under Section 5 of the FTC Act for engaging in deceptive acts or practices.”

LeadClick’s own actions caused significant harm to consumers, the court noted. “As the manager of the affiliate network, LeadClick had a responsibility to ensure that the advertisements produced by its affiliate network were not deceptive or misleading,” the panel wrote. “By failing to do so and allowing the use of fake news sites on its network, despite its knowledge of the deception, LeadClick engaged in a deceptive practice for which it may be held directly liable under the FTC Act.”

Affirming that the defendant was not entitled to immunity under Section 230 of the Communications Decency Act (because it was “being held accountable for its own deceptive acts or practices”), the panel affirmed summary judgment in favor of the FTC against LeadClick.

To read the decision in FTC v. LeadClick Media, click here.

Why it matters: Advertisers should take note of the standard set by the Second Circuit: that a deceptive scheme violating the FTC Act may have more than one perpetrator. “A defendant may be held liable for deceptive practices that cause consumer harm if, with knowledge of the deceptive nature of the scheme, he either ‘participate[s] directly in the practices or acts or ha[s] authority to control them,’” the panel wrote. “A defendant directly participates in deception when it engages in deceptive acts or practices that are injurious to customers with at least some knowledge of the deception. Similarly, a defendant who knows of another’s deceptive practices and has the authority to control those deceptive acts or practices, but allows the deception to proceed, may be held liable for engaging in a deceptive practice injurious to consumers.”

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FDA Releases Interim Guidance on “Healthy” Labeling

New interim guidance from the Food and Drug Administration eased the restrictions on foods that can be labeled as “healthy,” and provides insight as to how the agency approaches fats and certain nutrients in light of recent scientific developments and changing nutritional recommendations.

Previously, FDA regulations established certain conditions for bearing a “healthy” label (or related terms such as “health,” “healthful,” “healthfully,” “healthfulness,” “healthier,” “healthiest,” “healthily,” and “healthiness”), with specific criteria as to which nutrients should be limited in the diet, such as total fat and saturated fat, and which nutrients should be encouraged, including vitamins A and C.

The Dietary Guidelines have changed, however, and specific recommendations have “evolved over time as nutrition science has advanced,” the agency explained. “For example, scientific understanding and nutrition guidance has shifted from recommending diets low in total fat (2005 Dietary Guidelines) to no longer recommending limiting overall fat intake, and instead prioritizing increasing intakes of polysaturated and monounsaturated fats and decreasing intakes of saturated fat and trans fat (2015-2020 Dietary Guidelines).”

In light of the changes—and the argument raised in a petition filed by the manufacturer of KIND snack bars—the FDA tweaked its guidance for the industry.

First, with regard to fat, foods “that use the term ‘healthy’ on their labels that are not low in total fat should have a fat profile makeup of predominantly mono and polyunsaturated fats,” the agency said, a conclusion in line with the most recent dietary fat recommendations that have shifted away from limiting total fat intake. So a food may label itself as “healthy,” provided that “(1) the amounts of mono and polyunsaturated fats are declared on the label and (2) the amounts declared constitute the majority of the fat content,” the FDA said.

The second shift occurred in beneficial nutrients. Historically, the definition of “healthy” focused on the presence of vitamins A and C, as well as iron, calcium and dietary fiber. “Nutrient intakes have shifted over time, however, and vitamins A and C are no longer nutrients of public health concern,” the FDA said. “The nutrients of public health concern now include potassium and vitamin D, in addition to iron and calcium.”

In recognition of this change, a food may be labeled “healthy” if it contains at least ten percent of the daily value of potassium or vitamin D that a consumer customarily consumes, the interim guidance explained.

The agency also requested comment on the updated labeling guidance, including feedback on issues such as “Is the term ‘healthy’ most appropriately categorized as a claim based only on nutrient content?” and “What types of food, if any, should be allowed to bear the term ‘healthy’?” The FDA also asked “Should all food categories be subject to the same criteria?” and whether consumers understand the term “healthy,” as it relates to food and their expectations of foods that carry a “healthy” claim.

To read the FDA’s guidance for industry, click here.

To read the request for comments and information, click here.

Why it matters: Until the FDA finalizes its position on “healthy” labeling, the agency said it would “exercise enforcement discretion” for claims if the alternative nutrient criteria set forth in the interim guidance are met. Comments on the use of the term “healthy” in the labeling of food products will be accepted until January 26, 2017.

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News and Views

Marc Roth, chair of the firm’s TCPA compliance and class action defense practice, recently authored an article for Advertising Age on the dangers of mobile tracking. “As consumers spend increasing time on their mobile devices playing games, texting friends, searching for information and devouring entertainment, advertisers have embraced, though struggled with, this new medium given the challenges presented by the small screen,” Marc wrote. “But as important as reaching consumers on their mobile devices might be, the greater opportunity for advertisers might be learning more about their customers by tracking where they go and how much time they spend shopping.” To read the full article, “Keep Your Mobile Tracking Off the FTC’s Radar,” click here.

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