AD-ttorneys@law – April 29, 2022

Alerts / April 29, 2022

In This Issue:

Major NFT Marketplace Gets Hit with $1 Million Claim

Disgruntled user claims faulty security caused him to lose his token

Going Ape

We’re all familiar with the promise of non-fungible tokens (NFTs). Businesses are exploring uses for them from video games to concert tickets, and there is a burgeoning marketplace that includes art, music, collectibles and more. As with any new technology, where there is opportunity, lawsuits eventually follow, laying out the groundwork for our latest case: Michael Vasile v. Ozone Networks, Inc. Filed in New York State court, the complaint alleges that OpenSea, a dba of Ozone and a giant NFT marketplace valued at $13 billion-plus, is riddled with security vulnerabilities that allowed a valuable NFT to be sold out from under its owner.

Vasile is the owner of Bored Ape #8858, an NFT created by Yuga Labs. If you want to go deep on the actual Bored Ape NFT collection, be our guest, but for now you don’t need to know anything about it except that it’s valuable.

According to Vasile, #8858, which he had listed for sale on OpenSea, was valued at one point at 135.00 ethereum (a popular cryptocurrency), which translates to north of $400,000 as of this writing. Toward the end of January, #8858 was sold without his permission at a fraction of that high value (24.89 ethereum). It was then resold, he claims, to another user for 92.90 ethereum.

If his facts are correct, Vasile lost a ton of money.

Every Which Way But...

In OpenSea’s low-key yet somehow breathless company summary, NFTs are lauded for their “exciting new properties: they’re unique, provably scarce, tradeable, and usable across multiple applications.” This is a good summary of the appeal of NFTs — they model the favorable qualities of traditional physical assets in the digital marketplace.

But digital assets often present the same challenges that traditional asset classes have always struggled with — proof of ownership and security, for starters. According to Vasile, OpenSea, which has been the target of well-publicized phishing attacks, understood its systems were vulnerable and failed to take action to protect its customers. “Defendant was aware of its users losing NFTs due to the security vulnerabilities in Defendant’s platform,” the complaint reads. “Despite this, Defendant did not shut down or suspend transactions on its platform. Defendant continued operating, leaving its users at risk while continuing to collect 2.5% from every transaction.”

Furthermore, Vasile claims, his attempts to address the theft through OpenSea’s support services were ignored. He’s going after the platform for negligence and breach of contract, and at least $1 million in damages, along with the return of his beloved Bored Ape token. A cybersecurity negligence case is not a novel form of action, and, notably even in the NFT field, OpenSea has already faced similar lawsuits.

The Takeaway

What’s the lesson here? NFTs are undeniably compelling assets right now, and the churn and confusion surrounding them are significant. But be careful not to let confusion become part of the attraction.

Vasile does not detail the alleged “security vulnerabilities”; it would be interesting to learn the specifics of how OpenSea (allegedly) betrayed its duty to a paying customer. For now, the alleged theft may have been caused by a common scam, like a phishing attack or some other familiar method that compromised Vasile’s account. But because NFTs rely on a substructure that is new and still evolving, future security issues may develop that make a clever phishing scheme seem positively antediluvian.

If you or your clients are contemplating making a move into NFTs, slow down and perform thorough diligence. We have lots of great material for you to peruse — articles on the nature of NFTs, recent scandals involving the asset, NFT advertising basics, and one or two interesting stories about NFT-related squabbles. The market is a bit like the Wild West — and will likely remain so for the time being.

Kind Claps Back at Clif Commercial

Unsupported voiceover sends streaming spot back to the copywriters

Cruel to Be Kind?

We’ve seen brand rivalries erupt into disputes before the National Advertising Division (NAD) before, and this latest could be shaping up to be a classic: Clif Bar & Company vs. Kind LLC.

Last we heard, Clif had hauled Kind before NAD for multiple alleged misdeeds related to a television commercial produced by Kind. NAD recommended that Kind disclose which bars were being compared — to avoid making a line claim — and the weight difference between the bars because each is one serving size. On a third issue, NAD sided firmly with Kind, holding that depiction of brown rice syrup as a key ingredient in Clif’s product wasn’t misleading or pejorative.

Sweet, Crunchy Revenge

A year and a half later, the tables have turned. Kind flipped the script and summoned Clif before NAD for a number of claims it made in a commercial shown on online streaming services. If the first match was split, with Kind’s claims mostly surviving, Clif suffered a total NAD-slam.

The commercial is fun; NAD describes it as featuring “upbeat music and ... men and women skateboarding, running, practicing lacrosse, working out together, and weightlifting.” So far, so good — we love watching other people work out (just don’t ask us to join in). Venus Williams and Megan Rapinoe show up as well.

But Kind didn’t object to the collection of hard bodies. Its ire was reserved for a tag that appears onscreen, “The Ultimate Energy Bar,” which was accompanied by a voiceover intoning, “Let’s keep moving with the ultimate energy bar purposefully crafted with an optimal blend of protein, fat and carbs to keep you moving.”

The Takeaway

While “The Ultimate Energy Bar” might have survived had it appeared on its own as a perfectly acceptable piece of “hyperbole or non-provable opinion,” the fact that it was tethered to a set of “measurable product attributes (i.e., an optimal blend of protein, fat, and carbs)” proved too much for the folks at NAD. The comparison claim was unsupported because Clif failed to furnish relevant information about its competitors’ products, the “specific details regarding the actual blend of protein, fat, and carbs in CLIF Energy Bar varieties,” and any explanation of why those bars are “optimal or better than” those of Clif’s competitors. Notably, NAD found that the “optimal blend” claim on its own would also have been puffery, but together the statements made a comparative claim. The result is another victim in a long line of cases that made the mistake of mixing a comparative claim that sounds puffy, i.e., “ultimate,” with specific product attributes.

We’ll see if the Clif/Kind rivalry enters a third NAD cage match.

In the meantime, observe how much Clif might have gotten away with had it not added measurable claims to its piece. “The Ultimate Energy Bar” written over images of fit people working out to upbeat music? Doesn’t sound half bad in comparison to what wound up happening when its claims were discredited and the commercial had to be scrapped.

New Made in USA Label Rule Drains Battery Firm

FTC rules are mostly the same; it’s the penalties that are supercharged

In Other News ...

Did you miss the Federal Trade Commission’s (FTC) new Made in USA labeling rule? We can hardly blame you.

The rule was first proposed in June 2020, and it was finalized a year later. Summer 2020 through Summer 2021 — you were probably focused on other news, right?

The new labeling regime, written to attack “rampant Made in USA fraud” (in the FTC’s dramatic phrasing), “incorporates guidance set forth in the Commission’s previous Decisions and Orders and its 1997 Enforcement Policy Statement on U.S. Origin Claims.” That is, it doesn’t change much, except setting in stone the FTC’s right to penalize violators up to $46,517 per infraction.

The basics remain the same. Hear them again, mortals, and tremble: The rule forbids “marketers from including unqualified Made in USA claims on labels unless: 1) final assembly or processing of the product occurs in the United States; 2) all significant processing that goes into the product occurs in the United States; and 3) all or virtually all ingredients or components of the product are made and sourced in the United States.”

The labeling rule only applies to, well, labels; however, the agency has interpreted labeling very broadly, and labeling can include advertising in some situations, so tread carefully. Other varieties of origin claims will continue to be pursued under the Federal Trade Commission Act.

The Takeaway

So, who found themselves on the chopping block, you ask? Lithionics Battery LLC and its owner, that’s who.

Lithionics manufactures — you guessed it — lithium batteries (and related battery management systems). The company had allegedly been slapping “Made in USA” labels on both product classes and promoting their claims across a variety of media by photographing the products with the labels attached. According to the FTC’s complaint, however, the lithium batteries hawked by the company incorporated imported lithium cells, and the system equipment contained other foreign parts.

The real news here is not the order to cease the false claims; it’s the beefy $100,000-plus in civil penalties, which the owner of the company is jointly and severally liable for on an individual basis. Considering the limit on the FTC’s ability to obtain monetary relief after the AMG Capital Management decision, it’s not surprising that it may bring more actions under existing rules, such as the Made in USA labeling rule, where it does still have this recourse.

Company Cons Customers with Cut Creamer Quotient?

Class action says Laird Superfood undersold its serving size

Dark and Murky

This is an odd one.

Plaintiff Lovelynn Gwinn — who may or may not be the spunky hero of that historical romance novel set in 1840s London that we’ve been working on — sued Laird Superfood, a beverage and snack company dedicated to “the idea that nourishing, plant-based foods can help fuel you from sunrise to sunset,” in the Southern District of New York a few weeks back. We reviewed the case, and it caught our eye.

Why? On the surface, it seemed strangely subjective for what is essentially a slack-fill case. Gwinn accused Laird Superfood of “a straightforward and systemic course of false, misleading, and unlawful conduct,” namely, exaggerating “the number of servings that some of its Products contain in order to induce consumer purchases and to charge more for them.”

The product was a series of creamers of various flavors, and that’s what made us pause — everyone’s preference when it comes to their cup of tea or morning joe is slightly different. Some people want cream and two sugars (“light and sweet,” as they say in New York). Some want a dash of cream and no sugar. The amount of cream — or creamer, in this case — that goes into anyone’s idea of a “single serving” of coffee is going to be different. How could Gwinn sue for misrepresenting the number of servings in the package? Surely Laird made an arbitrary decision about the serving size of the creamer, named the amount of servings on the label, and left it to the consumer to figure out how many servings they wanted to use.

Unsweetened Theorem

But no ... this one is all about the math.

Gwinn claims that Laird Superfood records the 1 teaspoon serving size of its Superfood Creamer Unsweetened variety as weighing 2.0 grams. She counters that it actually weighs 3.1 grams, which is 1.1 grams more per serving size. “Because the total net weight of the package is 227 grams,” Gwinn alleges, “using one teaspoon per serving actually yields approximately 73 servings (227 grams / 3.1 grams) — not the 114 servings represented by Defendant.” Consumers thus purchase “64% of the promised number of servings.”

She provides similar stats for Laird’s Superfood Creamer (Original with Functional Mushrooms), Superfood Creamer (Original), Superfood Creamer (Chocolate Mint), Superfood Creamer (Turmeric), Superfood Creamer (Pumpkin Spice) and Performance Mushrooms. Across the various product lines, Gwinn claims “the Products can make only about 59% of the promised servings.”

You know the rest — the number of servings is a crucial piece of information on which consumers base their purchase, and they’re willing to spend more moolah for what appears to be more product.

Still, we can’t shake the feeling that this case is ... odd. Why the emphasis on serving size and not on bulk weight? Could a successful company really make such a mistake — or, if Gwinn is right, make such a misrepresentation without expecting to be caught?

We eagerly await Laird Superfood’s response.

Survey Slip-Up Squeezes the Juice out of Class Action

Plaintiffs’ expert was arguing for another case entirely

A Tale of Two Distributors

Beverage distributors Vilore Foods Co. and Arizona Canning Company (ACC) finally dodged a class action suit that has been hanging around and causing the companies trouble for the past two years.

At various times during the past six years, Vilore and ACC distributed the same brand of fruit juice — Kern’s, a subsidiary of Mexican drink producer Grupo Jumex. The juices in question were branded as “nectars” — “Apricot Nectar,” “Guava Nectar” and so forth.

The alleged problem wasn’t with the juices themselves, but with the advertising put together by the two distributors.

Doctor Who?

The plaintiffs — four California consumers — claimed that despite the inclusion of artificial flavoring dl-malic acid in the products, Vilore and ACC advertised them at various times as “100% natural” and “made with whole fruit.” They alleged this juxtaposition of label and tag violated various state and federal laws, and sued in California’s Central District for violations of that state’s Consumer Legal Remedies Act, Unfair Competition Law and False Advertising Law, as well as breach of express and implied warranties under its Commercial Code.

The original suit had been knocking around since May 2020 — we’re on the third amended complaint — but the evolution of the charges is less interesting than their denouement.

Late last year, the plaintiffs attempted to certify California and nationwide classes of consumers who purchased the fruit juices. But their effort was brought up short by the district court, which issued an order denying certification and sending the plaintiffs back to the drawing board.

What went wrong after all this time?

The plaintiffs had attempted to argue for a common class by citing an expert’s survey, the completely unironically named Dr. Belch.

The Takeaway

“Dr. Belch assessed the importance consumers placed on certain attributes when deciding whether to purchase juice-based beverages,” the court wrote in its order, “and the effect of an ‘artificially flavored’ label on consumers’ willingness to pay for such a product. He then concluded that consumers are willing to pay approximately 29% more for a Kern’s product with a retail price of 99 cents that does not indicate it contains artificial flavors, and 30% less for a product that contains artificial flavors.”

The good doctor’s survey didn’t do the trick, however. “Dr. Belch’s survey does not assess whether consumers, when considering the Products’ front labels, would be led to believe that the Products do not contain artificial flavors or contain only natural flavors,” the court continued. “Therefore, Dr. Belch’s survey results do not speak to the likelihood of deception stemming from the Products’ front labels and cannot establish such likelihood of deception on a classwide basis.”

(We wish that the court had referred to the study as “The Belch Survey,” but the Central District retains its decorum even in this vulgar age.)

With that, the class action went south and much facepalming ensued on the plaintiffs’ side. The expert testimony demonstrated that a misleading statement would cause harm to consumers, but the court found it did not show the statements at issue created that misleading impression.

It’s a surprising misstep and one we should all draw instruction from — make sure your expensive expert witness is proving the heart of your assertions instead of supporting a theory that only implies them.

Check Out Our Latest Blog Posts

The FTC’s Website Redesign – Broken Links, Missing Content and Broken Dreams

Whether you are an FTC fan or foe, we can all agree that one of the agency’s crown jewels is its consumer and business education program. For decades, this program has provided information that has helped consumers protect themselves and has provided businesses with important information and guidance to inform their decision making. And probably the most precious of these jewels is the FTC Business Blog.

What's in a Label – Three Takeaways from the FTC’s First Enforcement Action Brought Under the New Made in the USA Rule

Last year, the FTC finalized a new rule (Rule) that would allow the agency to seek civil penalties in matters where a company made a false and unqualified Made in the USA (MUSA) claim on product labels. In the rulemaking process, however, the FTC developed a very broad definition of “labels,” which led at least one commissioner to dissent because that definition “exceeds our statutory grant of rulemaking authority.”

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