AD-ttorneys@law - April 26, 2019

Alerts / April 26, 2019

In This Issue

Ad Industry Gears Up for Data Privacy Ragnarök

Privacy for America adds industry voices to brewing debate

Winter Is Coming

The California Consumer Privacy Act (CCPA) of 2018 continues to create waves in the data privacy debate and threatens to disrupt the complicated third-party digital marketing ecosystem. State governments and federal legislatures and regulators, alongside business and advertising associations, are heading toward a showdown over how data privacy and ownership are governed in the future.

It’s like the final season of Game of Thrones: Who’s gonna side with whom?

The nationwide debate was stirred up by the efforts of foreign governments, and other states were making noise too. But California, the 800-pound-gorilla of the U.S. economy, set the tone with one of the toughest, most expansive privacy rights regimes, which then-Governor Jerry Brown signed into law as the CCPA last July. So it was understandable that the federal government, via the Federal Trade Commission (FTC), decided to chime in – as a possible veiled warning about which power was going to have the final say on the issue. The problem? The CCPA was a rushed legislative compromise between proponents of an ill-conceived ballot initiative and industry; it avoided some of the worst elements of the initiative (e.g., a broad private right of action), but was not carefully crafted to balance legitimate and socially useful data collection and use – such as for the digital advertising that supports free content for consumers – and consumers’ interest in protecting misuse of their personal information. As a result, how CCPA consumer rights will be administered among publishers, advertisers and the many intermediaries between them remains to be seen.

The Whole Mishpocha

And now ad industry organizations are putting forward a solution. Meet Privacy for America (PFA), an advocacy coalition whose leading lights include the American Association of Advertising Agencies, the Association of National Advertisers (ANA), the Interactive Advertising Bureau (IAB) and the Network Advertising Initiative (NAI). Jessica Rich, former director of the FTC’s Bureau of Consumer Protection, is a noted grand eminence.

PFA’s mission: to outline a “bold new paradigm for a national law that would make personal data less vulnerable to breach or misuse and set forth clear, enforceable and nationwide consumer privacy protections for the first time,” while avoiding upsetting the digital advertising apple cart that supplies the revenues to support free-to-consumer content.

Specific advocacy issues include restrictions on using personal data to deny employment or healthcare, ending indiscriminate sharing of data with unaccountable third parties, banning the use of “certain types of data” (i.e., sensitive, but not all, data) in advertising, and building strong security protections. The group also calls for the birth of a new FTC Data Protection Bureau “to enhance the FTC’s longstanding expertise in overseeing privacy matters.”

The Takeaway

But are there any real specifics we can take away from the coalition’s kickoff announcement?

The answer is no – there’s very little concrete information about how PFA recommends addressing these issues. But if you look closely, there are a few clues.

First, this quote from Bob Liodice, CEO of ANA: “Americans must not be forced to choose between protecting their privacy and enjoying the many benefits they have all come to expect from the advertising-supported Internet, mobile and other media.” It seems likely that the organization will advocate something less than consumer opt-outs of the commercial sharing of their nonsensitive data – an approach favored by some privacy activists.

And there’s mention of a poll PFA commissioned, which claims that “63 percent of registered voters believed letting the federal government pass a national data privacy law would be the most effective approach to protect consumer data, compared to only 17 percent of registered voters who believed letting individual states pass their own data privacy laws would be most effective.”

Once again, it would seem, state legislatures are being put on notice. However, it will be interesting to see whether any additional amendments are made to the CCPA to account for these national coalition movements and desire to maintain some industry control over use of nonsensitive consumer data. And the California attorney general could essentially maintain the status quo of the current Digital Advertising Alliance (DAA) and NAI self-regulatory opt-out programs for interest-based advertising if his office follows the regulatory recommendations made by the NAI, DAA and IAB. As the CCPA continues to evolve through amendments and is further analyzed once the California AG provides regulations at the end of the summer of 2019, industry groups across the country and state legislatures will need to stay apprised of the shifts in this consumer data privacy law and the potential repercussions nationally, especially as they relate to digital advertising.

In the meantime, for tips on how to start to prepare for CCPA and the next generation of U.S. privacy laws that it is inspiring, see our U.S. Privacy Compliance Resource Center and our CCPA FAQs.

FTC Ups Payment Company’s Fine After Alleged Violation of Earlier Settlement

Priority Payout Corp. accused of repeatedly ignoring fraudulent behavior

Past Imperfect

The vast majority of the Federal Trade Commission (FTC) cases that we cover at Ad-ttorneys@Law are over very quickly, with settlements lickety-split. The FTC starts an investigation, and where errors or wrongdoing is found, the target typically works out a settlement and the complaint and consent order are then filed the same day. Litigation, and even enforcement of consent decrees, is unusual. The credit for this efficiency obviously has everything to do with strenuous behind-the-scenes negotiation and lawyering.

So, it’s a rare treat to cover an FTC complaint that has a long history – 10 years, in the case of Thomas Wells.

Original Sin

Wells is the brains behind Priority Payout Corp. (PPC), a payment processing company. Back in 2009, Wells and PPC – known at that time as Interbill – lost big when the FTC filed for summary judgment in a case against it before the U.S. District Court for the District of Nevada.

Wells and company were accused of violations of the FTC Act for processing payments on behalf of Pharmacycards, an allegedly “fraudulent enterprise.” The original complaint, filed in 2007, claimed that Pharmacycards posed as “a bona fide telemarketing business that sold medical discount cards to consumers.” But there was no product on offer; instead, there was a debit to the consumer account made by PPC, and then a negative-option mailer sent after the fact informing the alleged victims that they could cancel the offer within five days of receiving the letter. Many consumers received no notice at all.

The Takeaway

The final order, issued in 2009, hit PPC with a $1.7 million fine, the amount of alleged consumer loss that the company enabled. The standard settlement requirements were also included – namely, that Wells and PPC perform the due diligence necessary to determine whether future clients were operating on terms prohibited under the FTC Act.

According to the FTC, Wells and PPC didn’t follow through.

On April 11, 2019, the FTC released a statement claiming that PPC and its owner “repeatedly violated” the 2009 order by failing to follow through on proper investigations into some of its clients’ iffy business practices (at least two of Wells’ clients, Stark Law and Advertising Strategies, were previously sued by the FTC).

Wells and PPC agreed through the settlement that the FTC could prove the charges and submitted to a permanent ban from working in the payment processing service industry. Wells also suffered a $1.8 million contempt charge, which sits on top of the original fine, making his and his company’s total monetary loss to date $2.5 million.

Although this case is another example of the FTC’s enforcement power with regard to companies that violate the FTC Act and conduct fraudulent consumer business practices, this case also serves as a reminder of the broad reach of the FTC’s oversight into fraudulent practices and strict review of companies’ adherence to settlement terms agreed upon much earlier.

Brain-Power Boosters Draw FTC Ire

Federal Trade Commission says defendants claimed all-star roster of genius endorsers

The Frightful Four

Xcel, EVO, Geniux and Ion-Z: Sounds like a league of evil supervillains, right?

Well, according to the Federal Trade Commission (FTC), it’s an apt simile.

These cognitive diet supplement products were, according to a recent FTC complaint, marketed under a number of false claims – some of which sound like superpowers. For $47-$57 per bottle, the products were supposed to “boost brain power,” “increase focus,” “enhance memory” and “skyrocket concentration,” among numerous other promises.

Injustice League?

The culprit of the FTC’s suit was a large group of interrelated entities including holding companies, merchants, fulfillment companies, a payment processor, an advertiser and a handful of individuals accused of managing them.

But they weren’t just accused of making superpowered claims without actual clinical backing (although they allegedly claimed, “that the Geniux Products have been tested in human clinical trials, including over 2,000 trials conducted by the Nottingham Clinical Trials Unit.”)

The FTC also accused the Geniux defendants of using false endorsements to hawk the supplements (including fake plaudits by comedian and podcaster Joe Rogan) and marshaling affiliate marketers to create internet and email campaigns that mimicked legitimate news sites.

Celebrity Infatuation

To turn it up a notch, the defendants allegedly used the personae of real luminaries to “anchor” these ads – in the FTC’s complaint, one website allegedly “claimed that CNN reporter Anderson Cooper took Geniux for a fourteen-day trial, reporting that ‘Geniux is the real deal. The increase in focus, creativity and overall mental performance was a little bit scary to be honest – I felt like a different person.’”

The rest of the Geniux endorsement roster was equally ambitious, the complaint noted, attributing “dramatic results or achievements to others,” including celebrity scientists and entrepreneurs such as Stephen Hawking, Bill Gates, Elon Musk and – wait for it – Kanye West … suggesting endorsement of Geniux Products.

The Takeaway

The FTC’s complaint referred to false refund and risk-free claims, false advertising claims through consumer endorsers, false establishments, false product claims, and other misrepresentations.

There’s no special twist to end this story – the defendants settled the same day as the complaint through two separate orders (see here and here) barring the defendants from making similar product claims in the future, making false endorsements and other disclosures. The two orders differed only in terms of the amounts of the fines levied against the two subsets of defendants – between them, in the aggregate, on the hook for $25 million.

Although we continue to see these false endorsement and false refund and risk-free claims for products sold to consumers, and businesses employing these marketing tactics to lure new potential customers into purchasing their products and securing additional business from unknowing buyers, reputable companies avoid such techniques. However, all companies should exercise caution in the marketing of their “revolutionary” products and be certain to substantiate all claims, testing and endorsements through methods approved by the FTC, lest they wish to have an FTC complaint and subsequent consent decree.

Pyle Audio Ignores NAD Request on Fake Positive Reviews

Rival claims online reviewers were incentivized to say Pyle’s vacuum sealers don’t suck

Variety: The Spice of Strife?

Portable espresso makers, buffet servers/food warmers, sous vide immersion circulator cookers, something called a “raclette cheese melter” and gummy candy makers – NutriChef, a Pyle Audio brand, has quite a range of idiosyncratic kitchen appliances and gadgets.

Among that product roster are 10 separate vacuum sealer models – count ’em, 10 – the holiday staple kitchen appliance that a certain percentage of Americans is required to give to their second cousins at Christmas. There’s a law somewhere on the books mandating this, we wager.

Pyle Audio, which boasts a bewildering range of product lines – NutriChef for the kitchen, but also cameras, watches, stereos, bug zappers and more – was brought before the National Advertising Division (NAD) over these handy food repackagers. The accuser? Similarly, multifaceted rival vacuum sealer manufacturer Newell Brands (which is into glue, pens, baby car seats, pressure cookers, mason jars and more).

Perhaps companies with this range of product offerings simply can’t ignore each other. But in any case, the accusations were serious: Newell accused Pyle of encouraging its customers to post thousands of positive reviews online in exchange for free products – without letting anyone know about the underlying relationship.

How did it all play out?

Pyle refused “to provide a substantive response to NAD or participate in any way in the self-regulatory process,” NAD alleged. The watchdog group “referred the matter to the appropriate [yet unnamed] government agencies for possible enforcement action.”

The Takeaway

The Federal Trade Commission (FTC) requires companies that provide consideration to individuals who endorse products to follow strict disclosure requirements, so consumers are on notice that the endorsement was tied to a potential payment or product offering to the endorser. If this case is brought to the FTC for its review and enforcement, and the allegations against Pyle are proved to be true, it is likely the FTC would view this case as a potential violation of the FTC Act and require Pyle Audio to disclose future endorsements appropriately. NAD could have at most recommended changes in Pyle’s practices. Now Pyle risks real enforcement action by an authority that has the power to enforce fair and honest advertising standards.

Is Goya Pasta a Boricua Best?

Rival Riviana says Goya needs to give up “favorite” tags on the island

Coquí Claims?

Riviana Foods, maker of the iconic Ronzoni brand, isn’t giving up the island of Puerto Rico without a fight.

Riviana took rival pasta maker Goya Foods to task before the National Advertising Division (NAD) for allegedly staking an unsubstantiated claim to the affections of Puerto Ricans. Goya had used the advertising tag “Puerto Rico’s Favorite Pasta” for its Excelsior brand pasta in various marketing outlets, and that did not sit well with Riviana.

The discomfort makes sense – Puerto Rico is a distinct economy that boasts a significant and widespread diaspora in the mainland United States, the second-largest Hispanic community in the country. It’s an attractive market for anyone who can build loyalty.

The Takeaway

Goya Foods argued that the “Puerto Rico’s Favorite Pasta” tag is “classic puffery” – subjective advertising that nobody in their right mind would take literally. As proof, the company cited the “vague and fanciful language” that accompanies the tag.

The NAD sided with Riviana, arguing that “the advertising reasonably conveys a message that Excelsior is preferred to all other pasta brands in Puerto Rico,” and that such a claim was measurable and therefore required substantiation.

For anyone considering using similar claims and hoping to have them deemed mere puffery, it’s important to note that the NAD disregarded the additional subjective language that accompanied the main tag when drawing its conclusions. Just because a claim is surrounded by legitimate puffery doesn’t mean it is puffery.

The NAD asked Goya to put an end to the claim, but Goya is holding out on appeal. We’re not given much detail about its counterarguments, but according to the NAD, Goya maintains that its findings are “at odds with federal court precedent.” It will be interesting to see what precedent Goya will cite and how this case will ultimately conclude.

Baker & Hostetler LLP publications are intended to inform our clients and other friends of the firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience.

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