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.

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.

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.

Civil Penalties for Spyware?

In testimony before the Senate Committee on Commerce, Science, and Transportation, the Deputy Director of the Federal Trade Commission's Bureau of Consumer Protection, Eileen Harrington, explained that "legislation authorizing the Commission to seek civil penalties in spyware cases could add a potent remedy to those otherwise available to the Commission." According to Deputy Harrington in cases where seeking consumer redress or making the operators disgorge profit were insufficient, "a civil penalty may be the most appropriate remedy and serve as a strong deterrent." 

Green Guides Workshop III

On July 15, 2008 the Federal Trade Commission will hold its third workshop related its regulatory review of the Green Guides.  The focus of this workshop will be developments in environmental claims for building and textiles and the consumer perception of such claims.  Additional details are available here.

FTC & wireless content costs

During yesterday's forum on mobile marketing, FTC Commissioner Jonathan Liebowitz announced plans to target wireless content providers that fail to disclose fees. He noted particular concern over messaging, video, and gaming services aimed at teens, who are quick to adopt new technology and and are "easy prey for aggressive marketers."

This one hurts

A jury verdict in favor of adult web site operator Impulse Media is a blow to the Federal Trade Commission's efforts to hold advertisers liable for the conduct of their affiliates.  When it filed its complaint against Impulse Media (and others) alleging violations of the federal CAN SPAM Act, the Commission acknowledged that Impulse Media did not send the allegedly violative email.  Rather the Commission asserted that Impulse Media operated “affiliate marketing” programs in which it paid others to market on its behalf and thus was liable for the illegal spam sent by those affiliates.

According to seattlepi.com's Todd Bishop, Impulse Media argued that its policies prohibited affiliates from using spam and that it terminated affiliates that did.  These policies were "a sham," according to attorneys for the government, and terminated affiliates were allowed to re-enter the program.  Siding with Impulse Media, the jury returned a unanimous verdict in its favor.

Affiliate marketing is a cost effective way for advertisers to reach potential customers and its use is not limited to operators of adult websites.  The Commission should set out some realistic guidance on when it will seek to hold advertisers liable for the conduct of affiliates.  The version of "strict liability lite" the Commission is trying to impose is ignored by businesses, questioned by judges, and has now been rejected by at least this jury.  Likewise, advertisers and marketers need to realistically address problematic conduct by affiliates.  Affiliates that spam, employ spyware, violate the Do Not Call provisions of the Telemarketing Sales Rule, and engage in other deceptive conduct will invite overreaching by the Commission and reinforce the negative perception of affiliate marketing.

Thanks to Venkat at Spam Notes for the link.

Green Guides, round 2

The Federal Trade Commission will host its second workshop on the Green Guides on April 30, 2008.  This workshop will address developments in green packaging claims and consumer perception of such claims.  Interested parties have until April 11, 2008 to file comments regarding the issues to be addressed at the workshop. Additional information is available here.