Reasonable Basis

A tough week for Sears

After entering into a consent with the Federal Trade Commission for its collection and use of data from some of its My SHC Community members, Sears is involved in a second consent with the FTC, this time over environmental claims by Kmart.  According to Commission complaints, Kmart, a unit of Sears Holdings Corp., Tender Corp. and Dyna-E International all made false and unsubstantiated claims that their paper products were "biodegradable."  The Commission has been clear that unqualified biodegradable claims require scientific evidence that the product will completely decompose within a reasonably short period of time under customary methods of disposal. In the three complaints, the FTC alleged that the defendants’ products typically are disposed in landfills, incinerators, or recycling facilities, where it is impossible for waste to biodegrade within a reasonably short time.

Sears was watching you

Sears settled a Federal Trade Commission complaint alleging that it failed to adequately disclose the scope of the information it collected through a downloaded software application available to members of its "My SHC Community."  According to the Commission's complaint, Sears paid certain consumers $10 to download "research software" that would track their "online browsing."  The invitation from Sears to participate provided the following:  "This research software will confidentially track your online browsing. This will help us better understand you and your needs, enabling us to create more relevant future offerings for you, other community members, and eventually all shoppers."  This does not sound so bad -- track my "online browsing." However, on screen 4 of the 11 screen "Privacy Statement and User License Agreement," Sears explained that the software is more invasive than the invitation made it seem.  According to the agreement, the software "monitors all of the Internet behavior that occurs on the computer on which you  install the application, including both your normal web browsing and the activity that you undertake during secure sessions, such as filling a shopping basket, completing an application form or checking your online accounts, which may include personal financial or health information."   According the Commission's complaint, these disclosures were inadequate to inform consumers that the software would monitor all of their online secure sessions – including sessions on third parties’ web sites -- and that the software would collect information from these sessions, such as the contents of shopping carts, online bank statements, drug prescription records, and even the sender, recipient, subject, and size for web-based e-mails.

The consent requires Sears to stop collecting this information and to destroy the information it has already collected.

Attack Ads

According to Adage more companies are calling out their competitors in "attack ads."  Recent campaigns cited by the article include Domino's claims that it beat Subway in a taste test, Campbell Soup's campaign touting the superiority of its Select Harvest soup over General Mills' Progresso, Dunkin' Donuts boasting that it "beat Starbucks," and recent ads from Kraft asserting that its Oscar Mayer Jumbo Beef Franks taste better than hot dogs from Sara Lee and others.  The article notes the success of these ads but cautions that competitors are countering with increasingly aggressive responses, including litigation challenging ads they perceive as unfair or damaging to their product or reputation.  This latter point makes sense -- the more direct and aggressive an ad -- the more likely a competitor will be to challenge it.  Therefore, I recommend advertisers focus on claim interpretation and substantiation when considering comparative ads.

With respect to claim interpretation, an advertiser should consider all messages -- express and implied -- that both a reasonable consumer and an irate competitor might take from the ad.  A fundamental principle of advertising law is that the advertiser is responsible for all messages that a reasonable consumer would take from an ad, including claims that are unintended.  This is why it is important to review all ads from the perspective of a reasonable consumer.  Prior to making a comparative claim, however, I suggest also considering the ad from the standpoint of a competitor and analyze the implied messages a competitor who wants to stop your campaign might assert are made by the ad.  Engaging in this exercise may allow you to tweak the ad to "front-off" a potential challenge, develop substantiation for claims you had not considered previously, or run the ad as planned with a better understanding of what a potential challenge might allege.

A second principle of advertising law is that the advertiser must have substantiation for all messages a reasonable consumer would take from the ad.  The level of substantiation required varies depending on the claim.  If an ad claims a particular level of substantiation such as “a taste test” proves, then the advertiser must have data from such a test.  If the ad does not claim a particular level of substantiation, the advertiser must have an “appropriate” level of substantiation, based upon a number of factors, including the claim made, the product or service involved, the consumers’ ability to evaluate the product for themselves, and the potential harm to consumers of a false claim. 

Hot Dog Wars

Last week Sara Lee Corp. filed suit against Kraft Foods Inc. alleging that advertising claims for its Oscar Mayer Jumbo Beef Franks are false and violate the Lanham Act.  According to the complaint, Kraft promotes the product as "the 100% pure beef dog," when in fact up to 20% of the product "consists of. . . non-beef ingredients."  The complaint also asserts that taste tests relied on for its superiority claims were unreliable and that Kraft implies superiority across an entire product line, but only tested one product in that line.  Complaint via Am Law Daily

First Mini-Wheats, now Cheerios

It has been a bad few weeks for breakfast cereal manufacturers.  First the Federal Trade Commission took Kellogg to task for making false and unsubstantiated claims for its Frosted Mini-Wheats cereal.  According to the FTC's complaint, Kellogg claimed that Frosted Mini-Wheats were "clinically proven" to improve children's attentiveness by 20%.  According to the FTC, Kellogg had studies showing that only about 50% of children showed any improvement in attentiveness and less than 10% showed improvement of 20% or more.  Thus, based on the results of Kellogg's own studies the FTC alleged that the claims were false and violate the FTC Act.  As part of the consent order settling the matter, Kellogg is prohibited from making comparable claims about Frosted Mini-Wheats unless the claims are true and not misleading.  The order also "fences in" Kellogg from making claims about cognitive health, process, or function provided by Frosted Mini-Wheats or any morning food or snack food unless those claims are true and substantiated.  The order also prohibits Kellogg from misrepresenting the results of tests, studies, or research regarding any morning or snack food product. 

Not to be outdone, the Food and Drug Administration took aim at Cheerios Toasted Whole Grain Oat Cereal manufactured by General Mills.  According to a warning letter issued by the FDA, claims made on the label promote Cheerios "for conditions that cause it to be a drug because the product is intended for use in the prevention, mitigation, and treatment of disease."  The problematic claims on the cereal box state that consumers can lower their cholesterol by 4% in 6 weeks by eating Cheerios.  These claims, according to the FDA, "indicate that Cheerios is intended for use in lowering cholesterol and therefore in preventing, mitigating, and treating the disease hypercholesterolemia."  The FDA's position is that Cheerios "may not be legally marketed with [these claims] in the United States without an approved new drug application.  The letter makes a number of other assertions, including that Cheerios is "misbranded" because of the "unauthorized health claims in its labeling."  Absent from the FDA's letter is any assertion that the claims are false.

While the two actions have some similarities, the FTC's action is likely to benefit consumers, while the FDA's action is likely to make consumers less well off.  Kellogg made very aggressive establishment claims and lacked the data to support those claims.  Therefore, the FTC's complaint and consent order are justified and help prevent consumers for overpaying for a product that does not provided the claimed benefits.  On the other hand, the FDA's position is based on the fiction that consumers would understand the Cheerios box as communicating the message that Cheerios is intended as a treatment for hypercholesterolemia, rather than intended as a breakfast food that also happens to provide some benefits beyond alleviating one's hunger in the morning.  This will deprive consumers of valuable information.

FTC can seek gross revenue, not just profits

Two recent decisions held that the Federal Trade Commission can seek as restitution the full amount of loss incurred by consumers as opposed to disgorgement of defendant's profits.  Federal Trade Commission v. Stefanchik, 559 F.3d 934, 931-32 (9th Cir. 2009); Federal Trade Commission v. Medlab, Inc., 2009 WL 1066287 (N.D.Cal., Apr., 21, 2009).  Since the amount of loss incurred by consumers (or gross revenue), will be much higher than profits, these decisions increase the potential cost of an unfavorable decision in a matter involving the Commission. 

In Stefanchik the Commission charged that a corporation and its director violated the Federal Trade Commission Act and the Telemarketing Sales Rule by making false claims that consumers could become wealthy buying and selling privately held mortgages.  The district court granted the Commission's motion for summary judgment and defendants appealed arguing that there were issues of fact with respect to liability and that the facts did not support awarding $17 million in damages. In affirming the district court, the Ninth Circuit held that the Commission presented overwhelming evidence of liability.  On the issue of damages, the defendants argued that they should liable only for their profits, not the total amount paid by consumers.  The Court rejected this argument explaining, "[e]quity may require a defendant to restore his victims to the status quo where the loss suffered is greater than the defendant's unjust enrichment.  Moreover, because the FTC Act is designed to protect consumers from economic injuries, courts have often awarded the full amount lost by consumers, rather than limiting damages to a defendant's profits."  Stefanchik, 559 F.3d at 931.  Following the Stefanchik decision, the District Court for the Northern District of California held that the appropriate measure of damages was defendants' "gross sales, minus the amount already refunded to customers."  Medlab, 2009 WL at *10.  The Medlab Court rejected defendants' contention that "all legitimate business expenses should be subtracted from this sum[,]" and that the amount of damages would "financially obliterate" them.  Id. at *11.  The Court noted that the Stefanchik decision seemed to conflict with decisions in other circuits stating that disgorgement of profits is the appropriate measure of damages, but explained that it was bound by Stefanchik. 

Whether or not these decisions will be followed by other courts remains to be seen, however, the Commission will likely use them as a stick in trying to settle cases.

CSPI v. VitaminWater

The Center for Science in the Public Interest filed a class action lawsuit against The Coca-Cola Company alleging that it misrepresents the nutritional content and health benefits of its product, VitaminWater.  According to the complaint, Coca-Cola advertised and marketed VitaminWater as a healthy alternative to traditional soft drinks, when in fact it contains nearly as much sugar as a can of soda.  According to the plaintiffs, Coca-Cola's use of product names such as "Rescue," "Focus," "Balance," "Defense," "B-Relaxed," and "Power-C" and claims that the product was "specially formulated" to provide some health benefit were deceptive because of the product's sugar content, approximately 33 grams per 20 ounce bottle.

FDCA preempts claims over Aquafana

Finding their claims preempted by the Food Drug and Cosmetic Act (FDCA), the United States District Court for the Southern District of New York dismissed a class action complaint against Pepsico, Inc. over the labeling of its Aquafina bottled water.  The plaintiff class alleged that graphics of a red and orange sun rising over snow-capped mountains and the slogan "Pure Water -- Perfect Taste"  implied that the source of Aquafina was a mountain spring, rather than a municipal water tap.  As a result of this deception, plaintiffs allegedly paid a premium for Aquafina and alleged violations of numerous state laws.

The Aquafina label also contains the statement Purified Drinking Water," and this description, and a lack of understanding or disregard for advertising law on the part of the FDA when it promulgated certain regulations, doomed plaintiffs' complaint.  The FDCA defines "purified water" and Aquafina meets that definition.  The FDCA further provides that no state can impose any requirement for "purified water" that is not identical to that definition.  In promulgating regulations related to bottled water, the FDA recognized that graphics and depictions might mislead consumers if the source is different than the source depicted.  By way of example, the FDA  noted that a "country setting on a label may mislead consumers into believing that the product is spring water when it is not."  Such a depiction according to the FDA would render the product misbranded.  Thus, if bottled water is from a community water system -- tap water -- that fact must be clearly disclosed -- unless the water meets the definition of "purified water."  Given the language of the statute and the FDA's regulatory pronouncements, the District Court found that the plaintiffs' claims were preempted.  Aquafina is purified water and state law could not impose a requirement that Aquafina disclose its source, despite the depictions on the label, because it met the definition of purified water.

The FDA made the determination that it was irrelevant that consumers might be deceived by depictions and statements on the label as long as the water is purified.  This is inconsistent with principles of advertising law which generally finds that express claims, especially those on a product's label or packaging are material to consumers.  A copy of the decision is below.

Download Aquafina

FTC's Guides on Endorsements and Testimonials

The Federal Trade Commission is seeking comments on proposed revisions to its Guides Concerning the Use of Endorsements and Testimonials in Advertising. Endorsements and testimonials are advertising messages that consumers are likely to believe reflect the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser. The Commission promulgated the Guides in 1980 and the proposed revisions are part of its ongoing regulatory review process.

The most significant revision relates to "disclaimers of typicality." The Commission has long believed that an endorsement implies that the experiences or results of the endorser are typical or representative of the results that consumers will achieve generally. Based on its enforcement actions and consumer research conducted as part of its review of the Guides, the Commission has concluded that disclaimers such as "results not typical" or "results may vary" are ineffective at dispelling this implied message. Under the proposed Guides, the Commission makes clear that an advertiser should possess adequate substantiation for the implied representation that the experiences of the endorser are typical of what consumers will obtain, or clearly and conspicuously disclose the results that consumers can expect to achieve and have adequate substantiation for that representation. This disclosure is far more comprehensive than "results may vary." For example, an advertiser of a weight loss product that could not support a claim that users would typically lose 20 pounds just like the endorser, would need to clearly and conspicuously disclose how many pounds the typical user would expect to lose and have a reasonable basis for that claim. The Commission does not rule out the possibility that a disclaimer of typicality could be effective, but states that advertiser must have data to prove that the net impression of ad is non-deceptive.

The Commission asks for comments by January 30, 2009.

Classmates are not looking for you

Wired notes that a California man filed a lawsuit against classmates.com for allegedly misrepresenting that former classmates were looking for him on line.  According to the complaint, the plaintiff paid $15 for a subscription to the social networking site, which would allow him to contact those former school chums, only to learn that no former classmates had viewed his profile or had tried to contact him.  The lawsuit seeks damages and equitable relief on behalf of a would be class of all similarly duped subscribers.

I suspect that whether the ads were puffery, whether plaintiff's reliance was reasonable, and whether classmates.com made intentional misrepresentations will be front and center in the lawsuit.