Alerts

AD-ttorneys@law – February 5, 2019

Alerts / February 5, 2019

In This Issue:

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We Were Only Placing Orders!

Play Store pulls Google into game app COPPA suit

Tiny Trouble

New Mexico Attorney General Hector Balderas’ recent suit against app developer Tiny Lab Productions is a kitchen sink, grab bag and cornucopia rolled into one.

Balderas alleges in the 87-page complaint that Tiny Lab violated the Children’s Online Privacy Protection Act (COPPA) and New Mexico’s Unfair Practices Act. He claims that the company surreptitiously collects information without disclosure or consent from the children who are the primary audience of more than 90 of Tiny Lab’s applications. Some of the applications include kid-friendly names such as “Angry Bunny Race: Jungle Road” and “Baby Toilet Race: Cleanup Fun.”

COPPA Copper

Along with Tiny Lab, Attorney General Balderas’ complaint included several defendants involved in the children’s application data chain, including Google, whose app platform “Play Store” hosted Tiny Lab’s creations, and several advertising platforms that allegedly procured the surreptitiously collected information from the applications and used it to create targeted ads. This last batch of defendants included Google’s ad platform AdMob, and Twitter’s ad platform as well.

The complaint alleges that Google was aware that Tiny Lab was violating COPPA, and that it “condoned” Tiny Lab’s activities by sponsoring the app on Play Store’s “Designed for Families” program – in effect, “fraudulently [facilitating] Tiny Lab’s marketing of its apps as being safe and appropriate for children.”

The complaint also included details on the scope of COPPA violations in the app industry, research on the harm it does to kids, and an entertaining transcript of an email discussion between Google lawyers and researchers from UC Berkeley about the nature of the alleged violations.

The Takeaway

Google filed a motion to dismiss in mid-January 2019. The suit is shaping up to be a conflict over how COPPA works and the scope of potential violations.

For its part, Google argues that it is not obligated to research COPPA compliance for apps that are promoted in the Designed for Families program. The advertising giant maintains that “Google Play is merely a platform for the sale or distribution of apps,” and that the Federal Trade Commission “has made clear that COPPA does not apply to such platforms.” The company also notes that despite Attorney General Balderas’ language asserting Google’s “fraudulent” promotion of Tiny Lab’s products, Balderas never actually makes a misrepresentation claim.

Moreover, Google argues that the AdMob service was also immune to the charges, because “the Complaint recognizes that Tiny Lab represented to Google that Tiny Lab’s apps were not primarily child-directed and were COPPA-compliant and that Google relied on Tiny Lab’s representations” – which is permitted by COPPA.

The motion contains some interesting analysis of how companies determine whether apps are “child-directed” in the first place. Regardless, Google argues that it “was entitled, as a matter of law, to rely on Tiny Lab’s contractual promises to obtain parental notice and consent when required by COPPA.”

Google’s angle is, unsurprisingly, part of a larger trend we’ve seen at work with content platforms denying responsibility for the alleged violations of their providers. This complaint and regulatory action also represent a growing trend of regulatory authorities enforcing COPPA’s requirements and seeking damages from largely successful companies for their alleged violations. As app developers and companies continue to market toward the growing demographic of children with access to smart devices, these companies should exercise caution when representing apps that may be directed to children or appropriate for children, and be aware of the potentially damaging COPPA implications.

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Good Girl Gone Mad

Megastar Rihanna sues dad for doing business under her name

Umbrella Empire

Singer and actress Rihanna is a pop star and multitalented conglomerate. In addition to her musical accomplishments – seven multiplatinum albums, nine Grammy awards, 13 American Music Awards – she’s also the driving force behind several businesses, including cosmetics brand Fenty Beauty and a number of cross-marketed products with businesses like Puma and Stance.

Born Robyn Rihanna Fenty, Rihanna has marketed many of her products under the “Fenty” moniker, with intellectual property subsidiaries licensing her name and likeness to her business partners. Clearly her projects are yielding results; her total net worth was recently estimated to exceed a quarter of a billion dollars. As part of her next stage of development, she is branching out into acting.

With an empire like this, it’s no surprise that Rihanna is cautious when managing how her brand is represented to and perceived by potential consumers.

Unapologetic?

The United Kingdom-based Rihanna and two of her New York-based intellectual property holding companies launched a surprising lawsuit a few weeks ago. The targets of the lawsuit include Rihanna’s father, Ronald Fenty, and his business partner, Moses Perkins, who conduct business as Fenty Entertainment, which is an “entertainment and talent development” company operating out of Los Angeles.

In the complaint, Rihanna is suing her father for what she claims is a persistent pattern of misappropriation and misuse of her name and profile. The complaint claims that this misappropriation and misuse of her name started with the launch of Fenty Entertainment, which was accompanied by a press release that falsely stated that the company was founded in partnership with the singer (the release has since been removed from the company website).

The complaint goes on to allege that Rihanna’s father’s company continued to falsely advertise itself as connected to her, going so far as accepting, without her knowledge, an exclusive deal from a third party for Rihanna to tour Latin America. The pair allegedly told the third party that they had discussed the deal with Rihanna when they had not, and tried to secure payment exceeding $15 million for the arrangement.

When Rihanna’s people became aware of this activity in March 2018, they sent a cease-and-desist letter that they claim Ronald Fenty ignored. Furthermore, in August 2018, the complaint maintains, Ronald Fenty went ahead with a patent application to register the Fenty mark in the hotel industry.

The Takeaway

Rihanna is suing her father for unfair competition, false designation of origin and false advertisement under the Lanham Act, and misappropriation of name and invasion of privacy – false light publicity –under the California Civil Code. She’s seeking declaratory and injunctive relief.

Rihanna has had a troubled relationship with her father since her childhood, and these legal proceedings are sure to aggravate a delicate situation. As the complaint maintains, “Simply put, Mr. Fenty, Mr. Perkins and the Company are not presently, nor have they ever been, authorized to exploit Rihanna’s name, her intellectual property or the goodwill associated with her well-known ‘Fenty’ brand, or to solicit any business on her behalf.”

This lawsuit is an example of the power of intellectual property licensing rights and how brand integrity can be both commodified and easily damaged through exploiting such rights. Looking forward, it will be interesting to see how the court responds to the allegations in the complaint, and potential ramifications for Rihanna’s intellectual property rights and brand perception by consumers.

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Sterling Jewelers Hands Over $11 Million to CFPB and NYAG

Employees allegedly signed consumers up for credit without consent

Consumer Financial Protection Bureau

Elizabeth Warren recently announced her candidacy for president, and it is likely that one of her most well-known projects, the Consumer Financial Protection Bureau (CFPB or Bureau), will be a point of pride for her campaign. 

The CFPB regulates “the offering and provision of consumer financial products or services under the federal consumer financial laws” and aims to “educate and empower consumers to make better informed financial decisions.” Born in the wake of the financial crisis of the late 2000s, its scope includes consumer-facing products such as mortgages, credit cards and student loans.

Given its habit of collecting and publishing consumer complaints about the financial industry, the CFPB has attracted a bit of negative attention from the financial services industry. The Bureau was swept up into efforts to repeal Dodd-Frank and other financial regulation legislation, and it was even subjected to a contentious public discussion between two acting directors who claimed leadership of the Bureau.

Shine On, You …

In one recent case, the CFPB has demonstrated its continued willingness to pursue regulation of mainstream businesses that offer in-house financial products.

The Bureau filed a complaint in the U.S. District Court for the Southern District of New York accusing Sterling Jewelers of violations of the Consumer Financial Protection Act and the Truth in Lending Act, as well as fraudulent and deceptive practices under New York state law.

Consumers are likely to recognize the Sterling Jewelers storefront from popular shopping centers and malls – Sterling subsidiaries like Kay Jewelers and Jared operate in 3,600 locations in the United States, the United Kingdom and Canada. In total, the company takes in about $6 billion a year in sales.

The Takeaway

The Bureau claims that the jewelry giant indulged in several prohibited practices, including submitting credit card applications for consumers without their consent, misstating their financing terms and enrolling customers in payment-protection insurance without their consent. In one allegation, Sterling employees allegedly gathered customer information under the pretense that they were signing the customer up for a newsletter and used that information to issue a credit card.

These practices were allegedly encouraged by the company’s managers and its training practices. The Bureau claims that the company’s training material instructed employees to “offer to clean your Guest’s jewelry,” as a distraction “while you fill out the credit application.”

According to the complaint, Sterling at one point boasted more than 3 million credit accounts, scoring more than $300 million in yearly revenue for these types of practices.

The case settled in mid-January 2019, with the jeweler promising to pay the CFPB $10 million and the New York attorney general’s office $1 million. The company will have to hold on to its training materials and other records for five years and make changes to its financing procedures – for instance, informing every credit applicant that they are actually applying for credit.

A Sterling spokesperson denied the allegations and maintained that the company had “used this opportunity to internally reaffirm the transparency and fairness of our credit-related policies.” Nevertheless, this enforcement action and settlement demonstrate the Consumer Financial Protection Bureau’s broad enforcement power to penalize companies for misleading business practices and the Bureau’s ability to enhance consumer protection.

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Tax Geeks Lob Lanham Act at Rival Over Pricing Claims

Newcomer company known as Happy Tax takes on H&R Block for swiping keywords

Agony

From January until April 15, taxpayers are concerned with filing their taxes and seeking help from professional companies to guarantee the most efficient and legally compliant tax filings. Importantly, the companies that assist taxpayers with filing their taxes must tread carefully in securing their clients the lowest amount of tax while balancing a potential audit or further IRS inquiry. Recently, a newcomer tax preparation company known as Happy Tax filed a Lanham Act lawsuit against H&R Block.

Tax Revolution

Happy Tax, a Florida-based company, is positioning itself as a disrupter within the tax preparation industry: “Welcome to the tax preparation revolution!” its website announces. “Shaking up the $19 billion tax preparation industry, Happy Tax’s disruptive model was born out of frustration with unreliable, underqualified tax preparers with no licensing or certification and as little as five days of tax training,” claims a press release.

Instead of hiring representatives to sit in storefronts, Happy Tax offers a mobile platform to connect consumers with its franchisees, who are “serious tax code geeks:" licensed and certified CPAs. And the formula seems to be working; the company has contracted with more than 160 franchisees in 32 states.

Happy Tax’s complaint against H&R Block was originally filed in New York Supreme Court on January 15 and was promptly removed to the state’s Southern District. Happy Tax is accusing H&R Block of claiming that it is the only service that offers “transparent” and “upfront” pricing to its clients, while claims of transparency and upfront pricing have been prominently used in Happy Tax’s advertising for services since 2015.

H&R Block is accused of false and misleading advertising that is damaging Happy Tax’s profile and eroding the goodwill that Happy Tax has built up nationwide.

The Takeaway

Happy Tax says that it informed H&R Block that it had already rolled out the “transparent” and “upfront” terminology, but its rival has refused to pull down the offending advertising. Happy Tax alleges that H&R Block told its representatives that there was no conflict between the campaigns because “Happy Tax’s services are virtual or online,” as opposed to its own in-person services.

Happy Tax counters that the offending commercial (and other material) “specifically references that it applies to ONLINE [services] in print and targets customers of both in-person and online tax preparation services.”

It will be interesting to see whether this distinction between in-person and online or virtual service is enough to discount Happy Tax’s allegations. It is also worth noting that Happy Tax makes an additional claim in its complaint: H&R Block’s advertising is also “false because it was Happy Tax, and not H&R Block, that innovated the concept of ‘Upfront’ and ‘Transparent’ pricing in connection with tax preparation service” – a more general assertion that relies on an interpretation of industry history, rather than false claims of exclusivity. As the market for online and virtual services replaces in-person services typically offered by industry leaders, it will be interesting to see how the courts grapple with these claims of misleading advertising and damage to goodwill of competitors for the same services provided in different mediums.

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Blender Class Action Pureed by Utah District Court

Poorly argued complaint gets horsepower hopes poured down the sink

Shredded

When Alejandro Callegari filed a class action against defendant Blendtec in the U.S. District Court for the Central District of Utah, he claimed to have been misled by packaging claims on Blendtec’s “Blendtec Classic 475 120v Blender,” which he purchased online in July 2017. He alleged that he bought it specifically for its considerable horsepower – Blendtec sells models that boast 3.0-3.8 HP, which is presumably higher than the consumer blender industry standard.

But Callegari claimed that when he started blending with the Blendtec Classic, he became convinced that it was not living up to its advertised horsepower. He went ahead and enlisted electrical and mechanical engineers to test Blendtec’s claims. He alleged that their testing “concluded that no Blender exceeded more than 25% of the power output claimed by Blendtec, and that each power representation used to market the Blenders was materially overstated and false.”

In April 2018, Callegari filed suit, accusing Blendtec of violations of the Utah Consumer Sales Practices Act (UCSPA), breach of express and implied warranty, and violation of the Magnuson-Moss Warranty Act.

Bait and Glitch

The District Court examined Callegari’s complaint and dismissed his claims in their entirety. However, the dismissal was not due to his use of legal arguments, but rather because the complaint failed to cite appropriate Utah law.

The District Court held that Callegari’s claims under the UCSPA failed because while he alleged false advertising in his claim, he cited Utah code, which prohibited bait and switch advertising. “Plaintiff did not allege that he was diverted from the product advertised by Blendtec to some other product,” the District Court wrote. “He only stated that he would not have purchased the product, or would have paid less for it, had he known that the blender was not as powerful as advertised.”

Moreover, the District Court held, “Plaintiff has also failed to plead or provide to the court any other applicable rule that Blendtec may have violated.”

The Takeaway

It might have ended there, but Callegari’s suit was met with a further indignity. “Even assuming that Plaintiff could satisfy the UCSPA requirements for pleading a class action for damages,” the District Court wrote, “Plaintiff’s UCSPA claims would nevertheless fail for failure to comply with Federal Rule of Civil Procedure 9(b).”

Rule 9(b) requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” In the District Court’s opinion, Callegari’s complaint was undermined by his simple omissions of fact, including failure to mention where the blender was purchased, where he observed the false statements, and the specific misrepresentations made about the model he purchased.

“The Complaint did not specifically set forth the ‘who, what, when, where and how’ of Mr. Callegari’s purchase, or of any specific blender,” the District Court concluded. “Rather, Plaintiff made general statements regarding Defendant’s advertising practices … insufficient to satisfy the heightened pleading standards of Rule 9.”

This complaint and dismissal is a reminder of the importance of properly constructing the arguments in a pleading for the court’s review. Although the plaintiff may have had a strong case for damages, the insufficient citations to the proper law, incongruent arguments, and failure to satisfy pleading standards were ultimately the death knell to this particular complaint.

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