AD-ttorneys@law – October 14, 2021

Alerts / October 14, 2021
In this issue:

Swamped Commission Gets Compulsory Life Preserver

Rising tide of merger filings cited to justify new compulsory process resolutions


After a 3-2 vote, the Federal Trade Commission (FTC or Commission) approved the adoption of eight new compulsory process resolutions. The measures grant greater freedom to Commission staff to pursue investigations backed up by civil investigative demands and subpoenas – with fewer bureaucratic hurdles.

The processes focus on eight new areas: allegations involving practices directed at armed forces service members and vets, practices affecting kids, biases in algorithms and biometrics, deceptive and manipulative conduct on the Internet, repair restrictions, abuse of IP, anticompetitive ownerships, and monopolistic practices.

Stop That Fast Track!

The vote approving the resolutions was split, as the two Republican commissioners objected to the fast-track process inherent in the resolutions.

To review: Compulsory process resolutions put the heft of the courts behind investigative demands and subpoenas from the FTC, while requiring review and approval from only one of the five commissioners. “The resolutions,” the Commission press release announced, “… will broaden the ability for FTC investigators and prosecutors to obtain evidence in critical investigations on key areas where the FTC’s work can make the most impact.”

The majority justified the authorizations by invoking in part the “the increased volume of investigatory work created by the surge in merger filings,” which the Commission claims has doubled over the past 10 years. The streamlining means that “the FTC can better utilize its limited resources and move forward in earnest to quickly investigate potential misconduct.”

The Takeaway

The resolutions may be a sign of a sea change at the Commission, brought on by the arrival of Lina Khan in her new chairperson role. Very recently, in a “Vision and Priorities” document to the FTC staff that outlines her chief concerns, she articulated what she’d like to change at the FTC.

Give it a read; while it’s a bit general, it does outline her interesting multidisciplinary take on the Commission’s mission: the need to break down operational “silos” between the consumer protection and competition bureaus by taking on an “integrated approach to our cases, rules, research, and other policy tools.”

This new emphasis will be of interest to anyone in the digital ad game, as social media companies are coming under increased negative public scrutiny for market dominance and consumer protection violations.

Will New Balance Face $175 Billion in Made-in-USA Fines? counts sneakers; keeps the receipts

Original Spin

We’re accustomed to reporting on the online-influencer outrage du jour, but the present story has pedigree.

According to the folks over at Truth In Advertising, Inc. (TINA), ubiquitous sneaker and sportswear manufacturer New Balance has been coasting by with false made-in-the-USA claims for decades, ever since a 1996 consent decree from the FTC let it off the hook.

Back then, New Balance agreed to not make made-in-the-USA origin claims about any of its shoes “made wholly abroad.” But TINA maintains that the FTC let the company off the hook, permitting the same origin claims for shoes made of a mix of foreign and domestic parts but assembled in the United States. TINA argues that this slip on the part of the Commission encouraged New Balance to make the second set of claims before the ink was dry on the original decree – and it hasn’t stopped making them in the intervening decades.

Domestic Values

But you know the folks at TINA. They never forgive. And they never forget.

The watchdog group recently filed with the FTC a complaint letter festooned with examples of New Balance’s allegedly unjustified claims. According to TINA, Made in the USA, or some variant thereof, appears everywhere in New Balance packaging and marketing – sewn into the company’s sneakers and printed on the boxes they’re packaged in, the tissue wrap placed around the sneakers in the boxes, the labels on the outside of the boxes and so on.

TINA juxtaposes images of these claims with the fine print found on the company’s packaging and website stating that some of the products contain “a domestic value of 70% or greater.”

It is unclear exactly what “domestic value” means, but the disclaimer might not necessarily be the Hail Mary in any case.

All or Virtually Nothing at All

If you have to ask why it doesn’t matter, then we’ll offer this link to you straightaway: the FTC’s “Complying with the Made in USA Standard.” Go ahead – read it. Yes, the whole thing.

TL;DR? Here’s the relevant passage (but again, it’s best to review the whole document).

“All or virtually all” means that all significant parts and processing that go into the product must be of U.S. origin. That is, the product should contain no – or negligible – foreign content.

The Takeaway

How big a problem might this be? Back to the juicy $175 billion headline. One of Khan’s first acts at the FTC was to hold an open meeting, at which the Commission voted to finalize the Made in USA Labeling Rule. When the Made in USA standard is a formal rule rather than simply a policy or business guidance, violators can be fined penalties.

“Each violation of the [Made in USA Labeling Rule] carries a $43,792 fine,” TINA reasoned. “It only takes 23 shoes bearing a made in the USA label in violation of the rule to get to $1 million.”

Because New Balance claims to make 4 million pairs of athletic shoes in the United States each year and mislabels each pair at least once, TINA says, “New Balance could be facing more than $175 billion in fines for a single year.”

Is it likely that New Balance will be facing down more than $100 billion in fines? Probably not.

But should all companies making a domestic origin claim be concerned? Absolutely. Even a fraction of TINA’s final estimate is a considerable penalty.

It’s a helpful reminder that the all or virtually all standard applies to Made in USA claims and that these claims are often subject to heightened scrutiny. To paraphrase former Illinois Senator Everett Dirksen, “$43,792 here, $43,792 there, and pretty soon you’re talking real money.”

Georgia-Pacific’s Quilted Northern Gets a Limited Pass

Adjustments to sustainability and energy use claims are slight but instructive

We Probably Have to Get Out More

We’d put the National Advertising Division (NAD) up there with Faulkner and Balzac – exhaustive, expert chroniclers of their own little slices of the world.

We wish that someone would catalog all of NAD’s decisions in an omnibus edition – a Comédie Publicitaire – packed with extensive cross-referencing, footnotes and marginalia. It would make tracking the evolution of certain hot-button marketing and advertising concepts a breeze. And it would, ever so gradually, transform a dedicated reader into a careful, conscientious connoisseur of marketing and advertising.

Break Out the Razor

In our humble opinion, the most instructive NAD decisions are the documents where hairs are split ever so delicately.

So we’re happy to bring you another hair-splitter, a recent decision regarding Quilted Northern toilet paper, a brand owned by paper manufacturing giant Georgia-Pacific.

As a paper product producer, Georgia-Pacific undoubtedly wishes to present a palatable environmental image, and its Quilted Northern products include several benefit claims that make their case. And according to NAD, they’re doing a respectable job of it.

The claims – which include assertions regarding tree planting, energy-efficient manufacturing, and real-life energy and water savings – are a bit complex, so we won’t quote them in full here. But we will share an example or two.

What’s the Scenario?

NAD examined the claim that “our proprietary, efficient manufacturing technology squeezes out more water from the paper before drying. This saves 30% more water and uses 30% less energy.” NAD affirmed that this claim was “literally true” but noted that “the 30% savings is limited to a portion of the manufacturing process and not the total environmental impact of its product” and suggested that future marketing make this more clear.

Another scrutinized claim: “If just one household switched to Quilted Northern Ultra Soft & Strong for a year, it would save enough energy to: watch 21 college football games; microwave 104 bags of popcorn; charge a smart phone battery every day for 5 years.”*

Here, NAD draws another careful distinction. While the calculations behind the claims were solid and clarified by appropriate disclosures, Georgia-Pacific needed to make it clear that the energy savings from one household switching would cover only one of the scenarios listed, football games OR popcorn.

The Takeaway

Read the decision and check out the other claims NAD reviewed. Plenty of interesting material, especially concerning sustainability claims – it will serve as a helpful primer if you’re in the habit of making them. Notably, the claims here were not general sustainability or green claims, which are almost impossible to support, but very specific qualified claims about specific savings.

Also, it’s a great reminder about striving for clarity – no matter how it may impact your ad copy. This is where your marketing departments need to get creative. How can they construct effective messaging that builds in the distinctions that regulators demand?

Anticipating those distinctions is a better use of your time than figuring out how to get out from under negative attention to overly broad claims – and it’s a lot less expensive.

*reformatted copy from NAD website

Mobile-Gaming Loot Boxes Survive Gambling Charge

Developer Supercell wiggles out of Cali claims

Again with the Colors and the Noise

Here’s an update on a case we first reported last year – Mai v. Supercell Oy, a complaint lodged in the Northern District of California in August 2020.

We spent copious amounts of time researching the underlying mobile games in the case – defendant Supercell’s Clash Royale, a “tower rush” game, and Brawl Stars, a multiplayer online battle arena. We made a big deal about their ability to induce headaches.

But the underlying problem, according to plaintiff Peter Mai, is less the adult-maddening mayhem in the games themselves than the bad habits the game was encouraging – behavior akin to gambling in real life.

Loot Boxsplaining

The mechanism? Loot boxes, which we’ve discussed before.

(We are quite conscious of the fact that most of you already know what loot boxes are. Please forgive us for the following definition if you are part of the gaming cognoscenti.)

Loot boxes are virtual items purchasable within many games that confer some randomly selected in-game item on users. They’re generally available for an exceedingly small price – but those fees add up, to the tune of millions of dollars a year in revenue for a company like Supercell.

Mai maintained that the loot boxes within the games are illegal slot machines under California law because they require money to operate and offer a chance at a thing of value, and, essentially, their inclusion in the game promoted gambling – a real no-no, according to his complaint, under California’s anti-gambling laws, Unfair Competition Law and Consumer Legal Remedies Act.

The Takeaway

Alas for Peter Mai – Supercell moved to dismiss back in November of 2020, arguing that he had failed to state a claim and sending his case up in a puff of day-glo smoke.

“Mai’s UCL, CLRA, and unjust enrichment claims are all based on the fundamental premise that the loot boxes are illegal ‘slot machines or devices’ under California Penal Code 330b,” the court held in a recent order. But because the mobile games are “games of skill” – in other words, competitive in a way pure gambling games are not – he could not state a claim that it is a slot machine.

The court also rejected the argument that it should consider the loot box separately from the mobile game itself, pointing to the fact that the loot box prizes can only be used in the game and don’t have any real-world value.

Additionally, the court noted that the argument the loot box should be severable from the main game was contradicted by the complaint itself, which states the “machine, apparatus or device” under the slot machine definition “consists of a game downloaded onto a mobile game, tablet, or computer.”

But the court granted him leave for another bite at the apple, with leave to amend and refile. We’ll see what Mai and his counsel produce, but it looks like Section 330b is becoming a difficult avenue for app-related gambling cases. Check out the court’s order for supporting case citations.

Cancellation Clause Offers Dubious Protection for Contest Sponsors

Ending a sweepstakes or innovation contest early will still carry risks

Data Quest

As its full name suggests, the College of Healthcare Information Management Executives, or CHIME, has an interest in information technology of the healthcare variety. In 2015, that interest expressed itself in a contest – the CHIME National Patient ID Challenge – meant to develop a national patient identifier, or NPI, system.

You can imagine the appeal of such a system – a standard tool to facilitate the accurate identification of patients and the quick exchange of their information.

Mighty Contests

The specifics of the contest aren’t important beyond a few salient points. First, the $1 million prize offered to the final winner was significant. Second, the agreement that set out the terms and conditions of the contest contained a clause that allowed CHIME to cancel the challenge whenever, and for whatever reason, it wished.

Personavera, one of the companies that entered the contest, made its way to the final round – but CHIME issued a series of extensions that kept pushing the final decision forward until it canceled the contest outright in November 2017. Personavera’s owner alleged that when he requested CHIME return the prototype NPI he had developed, the organization refused.

Personavera responded by suing CHIME in 2018 in the Eastern District of Pennsylvania, alleging several charges, including breach of contract, promissory estoppel, fraud and negligent misrepresentation.

The case settled in August of this year. And while the terms of the settlement aren’t public, there’s a warning here for any company that’s contemplating a similar contest.

The Takeaway

Simply reserving a contractual right to cancel a contest or a sweepstakes at any time before the final prize is awarded will not immunize your company from litigation or losses in court.

Personavera pursued the case for three years to prove its point, and when it rejected the organization’s motion to dismiss last April, the court held up its assertion that a unilateral contract existed between it and CHIME.

But more importantly, the court noted that there are circumstances under which a cancellation proviso will not hold – for instance, in cases where the contest sponsor “breached the implied covenant of good faith and fair dealing,” which the court found Personavera sufficiently alleged.

This isn’t to argue against cancellation provisions altogether. They’re a prudent measure, as is requiring that participants agree to the official rules before entering.

But if you’ve launched a contest and are contemplating abandoning it, think carefully. Are your reasons for canceling legitimate? Do your best to figure it out yourself, or a court might do it for you.

Check Out Our Latest Blog Post

Slaughterhouse-Five: Myth-Busting with the Commissioner at NAD 2021

To kick off the final day of the National Advertising Division’s (NAD) 2021 virtual conference last week, FTC Commissioner Rebecca Slaughter gave a keynote address laying out her views on consumer privacy and the digital data economy writ large. Specifically, Commissioner Slaughter sought to bust five myths about privacy and data collection, and offered her perspective on where we ought to go in light of renewed congressional and regulatory scrutiny of data collection practices. More generally, Commissioner Slaughter hopes we stop thinking about these issues as “privacy” issues and instead start thinking about them in the context of “data abuses.” Here’s a summary of what the Commissioner had to say. Read more here.

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