Alerts

AD-ttorneys@law – June 12, 2018

Alerts / June 12, 2018

In This Issue:

Vermont Takes Aim at Data Brokers

New law, first of its kind, sets up broker registry, penalties

Pedigree

The state of Vermont – home to notable residents Bernie Sanders and Ben & Jerry’s – has been ahead of the curve on important legal issues for quite some time. Vermont abolished slavery before any other state, was the first state to allow same-sex marriage without a battle in the courts and adopted women’s suffrage before the country officially did.

In May 2018, the Green Mountain State made history again with another first – a state bill that takes aim at the power of data brokers.

Getting to Know ALL About You

People are well-acquainted with the idea of certain services (Facebook, Google, Amazon, iTunes) gathering our data for the purpose of creating better service offerings for us. We’re also well-aware that these companies (and others) have been accused of surreptitiously gathering our data and even swapping it among competitors and partners.

Data brokers, on the other hand, are slightly harder to define and are certainly less visible to the average consumer. Data brokers do not seek to provide useful services to consumers; rather, they mainly collect, purchase and share data on individuals with other companies and services. Data brokers also gather inferred data that approximates information that is normally protected by law. For example, your medical records cannot be shared without your permission. However, your credit card purchases at a local pharmacy might be added to your profile with a data broker, who can then infer from the purchase what your medical issues are.

The Takeaway

Vermont’s new law is succinct:

“‘Data broker’ means a business … that knowingly collects and sells or licenses to third parties the brokered personal information of a consumer with whom the business does not have a direct relationship.”

Companies that fit the definition will be governed by the law’s four basic provisions, according to the Vermont attorney general:

  • Brokers must meet certain minimum security standards for consumer data.
  • They must cease charging fees for initiating and lifting credit report freezes.
  • The law mandates a state-run registry that provides consumers with information about brokers, opt-out instructions and alerts when data breaches occur.
  • The law creates legal penalties for fraudulent acquisition or improper use of brokered data.

In and of themselves, these rules seem unlikely to immediately impact advertisers and marketers, but along with recent industry efforts to codify data privacy and transparency, a seismic shift may be pending beneath big data’s feet. The use of data brokers is an important practice, typically unknown to consumers, and one that many companies and advertisers use to market relevant products to individuals. Data brokers are also valuable assets for companies seeking to broaden their reach to new consumers and tap into previously untouched communities. This Vermont law may begin a wave of state-specific legislation across the country regulating the type of practices data brokers can engage in and will undoubtedly have legal implications for data brokers engaging with Vermont’s residents in the near future.

Roca Labs Pushes Back Against FTC’s Gag Gag

Company included non-disparagement clauses in purchase agreements, but was anyone really hurt?

Bypass

The Federal Trade Commission (FTC) filed suit against weight-loss supplement marketers Roca Labs Inc., Roca Labs Nutraceutical USA Inc. and two of their officers (collectively, Roca). The complaint was filed in September 2015 in the United States District Court for the Middle District of Florida and alleges that Roca made deceptive weight-loss claims, false establishment claims, misrepresentations through testimonials, deceptive discount claims and unfair use of non-disparagement provisions.

The suit centers on Roca’s “Formula” weight-loss products, which are powders and gels that, once consumed, allegedly fill up the ingesting consumer, suppressing hunger and reducing food intake.

The FTC alleged these products were heavily marketed through search ads, online videos and websites (including descriptive URLs such as Mini-Gastric-Bypass.me). The websites allegedly made a number of claims, including weight-loss results of up to 100 pounds over 7-10 months, a 90 percent success rate and – alarmingly – claims that the products were comparable in effect to bariatric surgery, which effectively allows users to avoid a gastric bypass procedure. Testimonials from users and doctors rounded out the picture and added to the misrepresentation through testimonials.

Gastro Nostra

Based on the available evidence, the FTC maintained that Roca’s claims of drastic successful weight loss were false and misleading. Importantly, there were no clinical trials or other scientific evidence proving the product’s effectiveness, and according to the FTC, those providing testimonials were compensated but this material connection was not disclosed.

One of the most interesting aspects of this case was Roca’s alleged use of “gag clauses.” These gag clauses were non- disparagement provisions contained in the product purchase agreements that threatened legal action against dissatisfied customers who complained about the product in public fora. From Roca’s point of view, the gag clauses supposedly justified Roca’s efforts to sue customers for defamation and slander if the customers publicly complained about the product. As an example, one version of the gag clause allegedly read: “[Roca Labs makes] it clear that RL and its Regimen may not be for everyone, and in that regard, the foregoing clause is meant to prevent one person from ruining it for everyone. Should any customer violate this provision, as determined by RL in its sole discretion, you will be provided with seventy-two (72) hours to retract the content in question. If the content remains, RL would be obliged to seek all legal remedies to protect its name, products, current customers, and future customers.”

Another version of the clause supposedly maintained that “any report of any kind on the web will constitute defamation/slander,” involving “a predetermined compensation of $100,000.”

The FTC argued that these legal threats, which were pursued in court against Roca customers, were not only illegal, but deprived “prospective purchasers of … truthful, negative information,” which led to more profit than Roca would have otherwise earned.

The Takeaway

The FTC filed an amended motion for summary judgment in April 2018, and Roca filed an opposition memo in the closing days of May. In addition to arguing that genuine questions of fact existed for most of the claims, Roca attempted to undermine the FTC’s attacks on its gag clauses.

Roca maintained that the FTC had no right to bring unfair practices charges centered on the gag clauses because the Consumer Review Fairness Act of 2016 had been signed after the alleged violations took place. Therefore, Roca argued that the FTC’s unfair practice charges did not meet the legal standard for summary judgment. Moreover, Roca claimed the FTC was required by its own policy positions to demonstrate that the clauses caused tangible harm to consumers in order to meet the substantial injury standard for unfair practices. Roca claimed that the FTC had not cleared this hurdle because the FTC relied on intangible injuries to justify the claim.

Roca also maintained that the FTC failed to present the required analysis weighing the costs of false negative reviews and compliance costs against “the magnitude of any substantial consumer injury caused or likely to be caused by the disparagement clause and the attempts to enforce same.”

Where the court lands on the use of intangible harm to prove substantial injury may have an interesting effect on the future use of non-disparagement clauses and will likely have an impact on how companies choose to continue using such non-disparagement clauses. This case is also another example of how the FTC continues to monitor and bring claims against companies who make weight-loss claims. Companies and advertising agencies should continue to exercise caution when claiming remarkable weight-loss results unless such claims are supported by competent and reliable scientific evidence.

Settlement in Movie-Candy Class Conflict

Maker of “Now and Later” agrees to pay out $2.5 million

Reminiscing

Most of us are generally familiar with the candies that children enjoy at the movie theater, including Lemonheads, Now and Later, Jujyfruits and other sweet treats. You may remember excitedly devouring these candies as the previews started to roll, and probably the last thing on your mind was exactly how much candy was in that box. However, these candies are now garnering the attention of adults due to slack-fill claims.

Sweet Crusade

Thomas Iglesias filed a class action complaint in February 2017 against Ferrara Candy, the maker of the Jujyfruits candy (and other well-known brands like Jawbreakers), alleging that the box of Jujyfruits he had purchased was half-slack filled with space that served “no functional or lawful purpose.” The complaint was filed in the United States District Court for the Northern District of California and alleged various violations of the California Consumers Legal Remedies Act, the California False Advertising Law and the California Unfair Competition Law.

Iglesias alleged that his investigation into the slack-filled Jujyfruits boxes revealed a pattern of having the boxes conventionally secured behind thick glass at the movie theater concession stands, which prevented purchasers from examining the boxes to determine the contents prior to purchase. Additionally, Iglesias alleged that because the boxes were opaque, consumers were further prevented from determining the volume of candy inside the package.

The Takeaway

In mid-May 2018, the parties filed a motion for preliminary approval of a class action settlement, with Ferrara agreeing to pay $2.5 million into a class action pool that would award $.50 per purchase to class members who purchased any one of a variety of Ferrara’s products sold in opaque boxes between Feb. 21, 2013, and the date of preliminary approval. Ferrara also agreed to adjust its packaging fill practices, pay administrative costs incurred by the class action pool, provide Iglesias a $5,000 incentive award and pay for a portion of his attorney’s fees. This settlement is an important demonstration of how consumers are continuing to bring slack-fill claims against popular food and beverage companies. As this trend continues, it will be interesting to see how companies avoid slack-fill claims while still providing a marketable and cost-efficient product.

Outlet Deal or No Deal?

Jersey and Cali consumers hit J. Crew with false pricing class action

Stereotypes

Some states have reputations for allowing plaintiffs to be particularly litigious and having demanding laws that regulate numerous types of businesses. In particular, New York, New Jersey and California are known to be some of the top states for providing platforms for plaintiffs to bring claims that would not be feasible in other states. Recently, this was demonstrated through a class action complaint filed against J. Crew (and numerous J. Crew affiliates and subsidiaries, collectively “J. Crew”) by two California residents and one New Jersey resident. The complaint alleged that J. Crew engaged in false pricing and violated numerous other aspects of the California Unfair Competition Law and other state-specific laws.

Creative Outlets

The complaint was filed in the Ventura County Superior Court of California in late May 2018 and alleged that J. Crew engaged in false reference pricing. False reference pricing is the practice of listing an inflated “regular” price of an item that is currently “on sale.” Then, the discount taken off the regular price appears steeper than it otherwise would have been, leading consumers to believe that they are getting a great deal (and perhaps make a purchase they otherwise might not have made).

The plaintiffs in this case claim that J. Crew was carrying out this practice for the past six years on women’s, men’s and children’s apparel sold in its “outlets” – J. Crew Factory stores, Mercantile stores and the company website. The plaintiffs also alleged that J. Crew designed clothes specifically for these outlets and then discounted them as if they had once been sold in the company’s mainline retail stores.

It was a “massive, years-long, pervasive campaign,” the complaint alleges.

The Takeaway

The suit alleges that J. Crew is liable for violations of the California Unfair Competition Law in all its flavors (unfair, unlawful, fraudulent practices), the California False Advertising Law and the California Consumer Legal Remedies Act; unfair or deceptive practices under the Federal Trade Commission Act; violations of New York’s General Business Laws and New Jersey’s Consumer Fraud Act and its Truth in Consumer Contract, Warranty, and Notice Act; and general charges of breach of contract, breach of warranty, unjust enrichment and negligent misrepresentation.

Based on this broad swath of claims against J. Crew for this alleged false reference pricing practice, it will be interesting to see how J. Crew responds to each claim. J. Crew’s defense, and the success of its arguments, will be important guidance for other companies engaged in similar pricing practices.

OXO gets NAD to give DKB an H2O TKO

Salad spinner testing methodology evaporates under scrutiny, NAD says

Clashing Palates

By its own account, the National Advertising Division (NAD) pays close attention to quantified performance claims. The NAD has stated that quantified performance claims have “a strong impact … on consumers” and that such claims must “closely reflect the test results upon which they are based.”

The NAD recently took notice of the challenge initiated by OXO International against one of its competitors, DKB Household USA, based on this precise issue. These two companies compete in a number of kitchen product lines and have a vested interest in ensuring consumers choose their product. In this case, OXO International argued that DKB Household USA made unsubstantiated claims about DKB’s salad spinner.

Devant Moi, Le Deluge

At the heart of the challenge was a very specific quantified claim: that DKB’s Zyliss Swift Dry Salad Spinner “removes 25% more water” versus leading competitor products. In its decision, the NAD noted that the tag line and a number of variants were used on DKB’s website and product packaging and in trade demo videos.

DKB responded to OXO’s challenge by providing a third-party test to back up its claims. However, the NAD determined that the testing was not sufficient to support DKB’s claims.

The NAD analyzed DKB’s third-party testing and noted that there were three fundamental problems with the results.

According to the NAD, the third-party test involved too small a sample size and yielded a wide variation in results. Given these flaws, “it is unlikely that the testing demonstrates a 25 percent difference in water extraction to a statistically significant degree.”

DKB also tested its spinner against only two other products – OXO International’s and another competitor’s spinners – and this narrow testing did not sufficiently support DKB’s broad claims regarding its performance as compared to “leading competitors.”

The most problematic issue for the NAD was that DKB’s third-party tests were conducted on simulated salad leaves made of cloth or sponges instead of actual salad leaves. According to the NAD, this study design violated one of the NAD’s principles regarding testing claims: “[T]he most reliable measure of a product’s performance is demonstrated by tests designed to test the product in the same manner the product is directed to be used by consumers.”

The Takeaway

DKB, while disagreeing with the NAD’s conclusions, agreed to its recommendation that it discontinue the claims. This case is an important example of the NAD evaluating a quantified performance claim and demanding that the testing provided as support be conducted in a manner designed to yield scientifically valid results. Companies seeking to make such claims should closely follow the NAD’s guidance and appropriately test their products before marketing strong performance claims to consumers. Undoubtedly, this area of self-regulatory enforcement will continue, and this decision highlights the NAD’s continued stance on product testing.

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