Alerts

AD-ttorneys@law - March 15, 2019

Alerts / March 15, 2019

In This Issue

FTC Files Complaint for Alleged Skin Care Negative Option Scheme

Complaint alleges hidden transactions, auto pay programs

Occupational Therapy?

If the Federal Trade Commission (FTC) has got its details right, one of the named defendants in a recent complaint, Gopalkrishna Pai (Pai), was very active in establishing and running more than 100 companies as part of a skin care products online scheme.

The FTC filed a complaint against Pai and several of his companies in the United States District Court for the District of Puerto Rico on Feb. 21, 2019, for the defendants’ practices relating to negative option marketing. The complaint alleged that the defendants used more than 100 shell companies with straw owners to obtain merchant processing accounts needed to accept and process consumers’ credit and debit card payments. These interrelated companies had addresses around the continent, including in Puerto Rico and Wyoming.

The Takeaway

According to the FTC, Pai used this mass of business entities to carry out an elaborate negative option marketing scheme which ultimately brought in tens of millions of dollars through their “deceptive trial offers and payment processing scheme.”

The alleged front for the negative option scheme was a suite of skin care products that were advertised as “risk-free” online, with only nominal shipping and handling costs. Once a consumer signed up, the FTC says, Pai and his companies would charge them $90 for failing to cancel the offer within 14 or 15 days; simultaneously, the consumer would be enrolled in an auto-ship program that charged $90 monthly. These arrangements were disclosed – but only under a small “terms and conditions” hyperlink in the ads that was light gray font and appeared away from the prominent text and graphics on the page that urged consumers to complete the checkout process. In addition, Pai is accused of making cancellations difficult or impossible, and evading detection by using his 100-plus companies to conceal credit card transactions.

Pai and his companies were sued by the FTC in the District Court of Puerto Rico for violations of the Restore Online Shoppers’ Confidence Act’s (ROSCA) illegal negative option provisions. The FTC sought an award to redress the injury to consumers resulting from the defendants’ ROSCA violations, a permanent injunction to prevent future ROSCA violations by the defendants, and an award for the costs of bringing the legal action. As of early March 2019, there was no word of a settlement.

This case is another example of the FTC aggressively monitoring and regulating companies which deploy negative option marketing to sell their products. Although companies may legally market to consumers for trial periods and “risk-free” purchases, they must do so in compliance with the technical notice and consumer cancellation rights provisions of state and federal laws. The FTC has continued to crack down on those entities which fail to adequately disclose the full terms of these subscription agreements and fail to provide adequate notice to the consumer.

Army of Fake Reviews Pumped Product Ratings, Says Commish

Weight-loss supplement maker must pay for false claims and fake reviews

Wincing the Weight Away

When the Federal Trade Commission (FTC) sued Brooklyn, NY-based Cure Encapsulations Inc. and its owner, Naftula Jacobowitz, it hit the defendants with two separate issues related to its “Quality Encapsulations Garcinia Cambogia Extract with HCA” product, which is considered a diet supplement.

First, the FTC maintains that Jacobowitz’s claims that the supplement acts as a “carb-blocker,” an appetite suppressant and a weight-loss supplement are false and unsubstantiated. Notably, there has also been discussion among laypersons online about the plant in question, garcinia cambogia, and the effects that the plant’s extract can have on weight loss for consumers. Second, the FTC alleged Jacobowitz purchased fake reviews for the product being sold on Amazon.

Love for Sale

Importantly, this February 2019 complaint is the FTC’s first suit brought against a company for buying fake reviews.

Specifically, the FTC produced an email that Jacobowitz allegedly sent to the website amazonverifiedreviews.com: “As I told you yesterday, I need 30 reviews 3 per day… The goal of my competition is to bring me down to a 4.2 overall rating, and I need to be at 4.3 overall in order to have the sales.”

Shortly thereafter, he allegedly wrote again, “Please make sure my product should stay a five star.”

The FTC has provided transcripts of the alleged fake ads, which were mailed from amazon-verifiedreviews to Jacobowitz.

The Takeaway

In addition to the false and unsubstantiated efficacy claims regarding weight loss, the FTC hit Jacobowitz with false endorsement claims, and is seeking a permanent injunction against future unsubstantiated claims and fake reviews.

As is common in these cases, the defendants settled quickly. In addition to a $12.8 million judgment and the standard prohibitions against the illegal behavior, Jacobowitz is required to “notify Amazon, Inc. that Defendants or their agents purchased reviews of Quality Encapsulations Garcinia Cambogia Extract with HCA sold by Defendants and appearing on the www.amazon.com website.”

Moreover, Jacobowitz is also required to email a detailed summary of the FTC’s critique of its weight-loss-related claims to consumers who bought the supplements. As businesses will continue to sell and market their products to online customers, customers can be expected to continue to put value in online reviews and ratings that appear to be from other customers for these products. Accordingly, the FTC can be expected to police reviews and take action with respect to unsubstantiated health claims and fake reviews for the products on these online platforms.

Mahindra Tractor’s Appeal of NAD Decision Put Out to Pasture

NARB panel affirms Division’s changes to sales, warranty and product superlatives

Tractorstruck

John Deere isn’t just a brand. In some parts of the United States, it’s a culture.

Given the widespread prevalence of John Deere products as part of a culture, the arrival of India’s Mahindra tractors in the United States back in 1994 sparked a serious rivalry between the brands. Given Mahindra’s overseas origin, it’s unlikely that the same cultural references in the United States will ever build up around the import brand, but the new arrival is still gaining attention as a popular competitor to John Deere.

Marketing and Warranty Claims

Unsurprisingly, John Deere pays close attention to Mahindra’s advertising. Back in June 2018, the company took exception to several of Mahindra’s marketing claims before the National Advertising Division (NAD). Mahindra appealed NAD’s findings before the National Advertising Review Board (NARB), which reached its own conclusions this February.

The claims under consideration included Mahindra’s boast that the brand was the “World’s #1 Selling Tractor” and the “#1 Selling Tractor in the World.” Additionally, John Deere objected to the Mahindra warranty claims, including the tags “#1 in protecting your back … with the industry’s best 5-year warranty” and “Best and industry’s leading limited powertrain warranties.”

NAD’s original ruling held that Mahindra “provided a reasonable basis” for its sales claims – the company relied on the Agricultural Equipment Statistics Committee of the Association of Equipment Manufacturers’ standard definition of “tractor.” But NAD requested that Mahindra disclose this definition when making its claim, along with the information that the claim was based on Mahindra tractor sales worldwide when combined with the sale of its Swaraj-branded tractors in India.

As for the warranty claims, NAD recommended that they be discontinued, although Mahindra was not precluded “from making truthful claims regarding any specific attribute in which Mahindra’s warranty is superior over its competitors, including the length of the warranty.” Finally, claims that Mahindra’s oil provided “Superior Protection” should be discontinued based on the lack of supporting evidence.

The Takeaway

NARB agreed with NAD’s recommendations regarding its sales figures and requested that Mahindra’s claim that “over [2.1] million Mahindra tractors sold worldwide to date” should specify the time period for the sales.

Mahindra had argued before NAD that its “best warranty” claims were puffery, but the NARB agreed with the original decision recommending that the claims be discontinued because certain types of tractors were not covered by the warranty provisions in question. Truthful claims about parts of the warranty could still be made in the future.

Finally, NARB rejected Mahindra’s argument that its oil claims were puffery, finding “these were objectively provable claims requiring substantiation,” and letting NAD’s original finding stand.

This case is a good example of how a brand can use the self-regulatory process to police its competitors, protect its brand and avoid the expense of litigation.

Will Nectar Sleep Wake from a Recurring Dream?

Bedding manufacturer doesn’t respond to NAD over limited time offer, gets FTC attention

SFW, but Still

There is an ad circulating online from Nectar Sleep, a mattress maker that markets its “bed of your dreams” with snappy, fast-talking, absurdist ads. The online video includes CGI caricatures of Donald Trump and Kim Jong-un with their disembodied brains hitting each other on a dance floor. The two-and-a-half-minute marketing piece is titled “Make America Sleep Again,” and has been watched on YouTube over 13 million times.

As absurd as this marketing piece between CGI caricatures of Donald Trump and Kim Jong-un is, the legal issue more specifically relates to Nectar Sleep’s recurring offer on their website. On their website and with their online product mentions, Nectar Sleep includes a recurring offer: “LIMITED OFFER: $125 Off + 2 Free Pillows.”

Tuft & Needle, one of Nectar Sleep’s competitors in the bedding industry (see here, here and here), took the tag line before the National Advertising Division (NAD), alleging that the tag “misrepresents the price at which the Nectar mattress is sold because (1) it is not, in fact, offered for a limited time because this price point is always available to the purchaser, and (2) the pillows are never offered for sale by Nectar, therefore they are misleadingly offered as ‘free.’”

NAD claims that it never received a “substantive response” from Nectar Sleep addressing Tuft & Needle’s claims and asserting any of Nectar Sleep’s defenses. Based on Nectar Sleep’s lack of response, NAD will likely kick the matter upstairs to the Federal Trade Commission (FTC) for review.

The Takeaway

What calculus does a company engage in when it decides to risk FTC review? Is it because an offer or an ad is so successful, it’s more cost-effective to let the ad round up business until a complaint is filed? Or is it something else?

This is not the first time that Nectar Sleep has been confronted with the FTC’s enforcement powers. Nectar Sleep settled a made-in-the-USA complaint before the FTC about a year ago. Therefore, Nectar Sleep is reasonably aware of the FTC’s broad enforcement for misleading marketing claims that may reasonably deceive consumers and the penalties that follow. It will be interesting to see how the FTC responds to this case, as Nectar Sleep has elected to not respond to the NAD complaint and Nectar Sleep has already been ostensibly warned that the FTC will take sweeping action against misleading businesses practices when needed.

Epic Games Sued by Minor Over Llama-Shaped Cash Cow

Fortnite publisher accused of addicting children to escalating microtransactions

Primer

We would wager that you know all about Fortnite, a game that has become very popular for children, teens and even adults (albeit immature ones) across the country. The game seems inescapable – constantly referred to in the mainstream media as a cultural monster that has swallowed the nation’s children whole. If you have (or even just know) children of a certain age, you’ve heard about it or seen them endlessly playing it.

At AD-ttorneys@law, we strive to provide a benefit to all our readers, so for the three or four of you who don’t know about the game, here’s the skinny:

Fortnite is an insanely popular game that grew out of a simple insight: combining the first-person shooter genre with the construction game genre (think Minecraft, the last cultural monster that seemed to have captured children’s attention nationwide). The original release of Fortnite spawned a “Battle Royale” version of the game, which blew the doors off the genre: an unheard of 3.4 million players logging in concurrently to fight in 100-player arena battles. This second version of the game, which was released only in late 2017, is estimated to have raked in $2.4 billion in 2018.

Any endeavor that rakes in that much money that quickly is a lawsuit magnet, and deservedly or not, Epic has mined its share from the Fortnite game line.

Llama Drama

The most recent is a suit brought by a guardian on behalf of his young charge, named in the suit as “R.A.,” in the United States District Court in the Central District of California. The suit asserts that the very structure of the original Fortnite’s payment-and-reward system implies unjust enrichment and violates California’s Consumer Legal Remedies, Unfair Competition and False Advertising Laws.

Epic, like many other gaming companies, has recently forgone the traditional payment model for games: Instead of purchasing a complete game, users download a free version that is immediately playable. The trick is that the free games reward microtransactions – small in-game purchases – that offer cooler looks for the player’s persona, or make the game easier to play, or unlock features and levels that free players would otherwise miss. From these small in-game purchases, Epic has made billions of dollars.

In Fortnite the moneymaker is a so-called Llama, a loot box shaped like its animal namesake, which can be purchased with in-game currency. The boxes, when opened (you bash them with a stick, like a piñata), offer items that better the users’ odds of dominating in the game.

The intricacies of the in-game payment system are deep, but R.A.’s central complaint equates the Llamas with gambling on several different levels.

First, the suit claims that the online currency used to purchase Fortnite Llamas, earned by spending real-world currency or amassing hours of playtime, creates confusion among minors who play the game and have difficulty conceptualizing how much real-world money they’re actually spending. Moreover, it claims that the ratio between the value of in-game currency and the price of the loot is intentionally mismatched, leading to a cycle of escalating earning and purchasing – what the suit calls the “10 hotdogs, 8 buns” trick. Finally, the company allegedly makes ongoing charges very easy and provides no payment history – which the complaint alleges are a perfect match for minors who are at a developmental disadvantage when it comes to self-control.

The suit claims that each Llama offers a random set of loot, with the chance of a big payoff of special, highly valuable items. But despite tiered pricing models that suggest a player is purchasing better odds for good loot by spending more money, the chances of receiving the special loot are “extremely unlikely.” False upgrade schemes allegedly milk more money from players hoping to increase their chances for good loot.

R.A. claims that Epic has received numerous complaints about these schemes, and quotes a number of them, including this passage: [I]t feels like I am gambling to get good gear they’ve made it really hard to make this game fun due to this unrewarding llama system . . . it makes you spend a ton of money for llamas that you’ve no good way of telling if you’re going to get something good. This is almost unacceptable[.]

That “almost” is chilling in the context of R.A.’s larger claim: that Epic’s reward system is a form of gambling that children find hard to resist.

The Takeaway

Epic hasn’t replied to the complaint yet – we’ll be sure to give equal time to their counterarguments. This complaint is one of an increasing number of suits filed by parents on behalf of their children for deceptive and/or illegal marketing practices by companies that market and deliver products to youth consumers. Based on the popularity of this children’s game, it will be interesting to see what type of fallout or corrective actions Epic takes in response to the complaint and allegations, as this type of legal action will undoubtedly shine a light on the online game industries’ marketing and business practices, especially as they relate to children.

We refer businesses that target children to the Self-Regulatory Program for Children’s Advertising (known as CARU) and its guidance for advertising and sales activities directed to children. The guidance prohibits techniques that take advantage of the susceptibility of children to advertising and sales and children’s lack of developmental maturity. As we penned a couple of years ago here, we have long wondered when state attorneys general or CARU would take on children’s game publishers for “funpain,” “freemium” and other in-game purchase schemes that go too far in order to extract more than pocket change from children.

Updates on California’s Consumer Privacy Law

The California attorney general (AG) has kicked off its process of promulgating regulations to interpret and implement California’s sweeping new privacy law. After a series of public hearings across the state, which we covered here and here, the AG closed the initial public comment period on March 8. Our clients have mostly sought to convey their comments through their respective trade organizations. About a dozen of our clients asked us to supplement those efforts with a set of aggregate comments, which we filed and are available here. To follow CCPA and other state and federal privacy legislative and regulatory developments, visit our U.S. Consumer Privacy resource. Legislation is pending in approximately 15 states and at the federal level. For more information, contact the author.

Notably, California Republican lawmakers have introduced another California privacy law titled “Your Data, Your Way,” which would expand and strengthen consumer privacy rights beyond what is required by the CCPA. For more information about the Your Data, Your Way legislation, please visit here.

Speaker Spotlight

Association of National Advertisers’ 2019 Advertising Law & Public Policy Conference, Washington, DC

Amy Ralph Mudge, co-leader of BakerHostetler’s Advertising, Marketing and Digital Media team, will participate in a dynamic discussion on diversity in advertising at the ANA’s Advertising Law & Public Policy Conference in Washington, D.C., on March 19-20. Alongside panelists Eugenia Blackmon, director, U.S. Commercial Compliance, Project Moonwalker, Allergan, Inc.; Shantel Smart, senior corporate counsel, global contracts, Subway; and Deidre Richardson, senior director, corporate counsel, Chico’s FAS, Amy will explore the role of legal practitioners in matters of diversity and inclusion. To register, click here.

International Trademark Association’s ‘The Business of Brands’ Conference, New York, New York

INTA has invited Linda Goldstein, co-leader of BakerHostetler’s Advertising, Marketing and Digital Media team, to serve on the faculty of its conference, The Business of Brands, in New York on March 28-29. Linda will participate in a panel discussion of the legal requirements for responsible advertising. For additional information, click here.

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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