Alerts

AD-ttorneys@law – March 6, 2019

Alerts / March 6, 2019

In This Issue

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ERSP Asks Investing Daily to Tone It Down

Programs asks what a typical investor’s experience is likely to yield

Hard Sell?

Investing Daily is a website that promotes a handful of splashily titled publications such as Radical Wealth Alliance, Income Millionaire and Velocity Trader. From these examples alone, it’s clear that Investing Daily has no qualms about making an impression.

But it was the company’s more parochial flagship publication, Personal Finance, that caught the eye of the Electronic Retailing Self-Regulation Program (ERSP or Program).

Personal Finance may be familiar to you; it’s been advertised widely on the web, including through videos featuring various experts and spokespeople lauding its moneymaking prowess. The publication is Investing Daily’s main subscription service that provides investment recommendations such as equities, fixed income and options. And despite the staid title, the pitches for the publication can be fierce.

Take the following, for example:

“Give me 9 minutes a week and I guarantee you $67,548 a year.”

  • “Look how easy it is to collect thousands of dollars in ‘free money’ every month.”
  • “And that’s why selling options is about the closest you can get to never losing money investing.”
  • “‘I ended the year with a cash flow well over $100,000 … which is just plain unbelievable.’ – Roger D., Wayzata, MN”

Six of One …

Investing Daily promised to cooperate with the Program’s inquiry and make changes to its taglines, but its first efforts were judged as somewhat … equivocal. ERSP alleged that Investing Daily changed the claim “I want to thank you for taking the first step to earning an average of up to $185 per day, every day … forever” to “I want to thank you for joining me on the path to earning up to $185 per day, every day trading options. That adds up to $67,548 per year.”

ERSP persisted in its inquiry, holding that both versions of the text were making earning claims for which a marketer must have a reasonable basis, and that neither was substantiated by the evidence at hand, which included articles describing prior instances of successful trades found in another program available for purchase by Personal Finance subscribers. Additionally, ERSP evaluated claims Investing Daily made about higher education and goods such as diamond rings and concluded that these were “implied earning claims that communicate that consumers can earn enough money to achieve these goals.”

The Takeaway

While ERSP objected to the promises of “quick and easy” wealth, the heart of its critique focused on the lack of information in the ads about what constitutes a typical investor experience, especially because the ads included many consumer testimonials that should have contained clear and conspicuous disclosures as to the amount of money consumers can expect to earn. While ERSP didn’t challenge the ads’ claims that Personal Finance’s spokesperson Jim Fink had done quite well as an investor, it still held that testimonials to that effect constituted earnings claims.

And in the final analysis, these claims could not be measured against a benchmark user experience: If “earning claims being disseminated by a marketer are attributed to product users and are atypical, then the marketer’s burden is to disclose (clearly and conspicuously) the amount of money consumers can generally expect to earn.”

Therefore, “ERSP recommended that the marketer discontinue the use of customer testimonials and claims regarding the success of Jim Fink,” and include disclosures revealing the typical investor’s experience.

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Second Circuit Sends Quincy Bioscience Back to the Lab

Conflicting claims in scientific studies not enough to dismiss Prevagen case

Remember This One?

The Second Circuit Court of Appeals breathed new life into a joint complaint by the Federal Trade Commission (FTC or Commission) and the state of New York against Quincy Bioscience, a “biotechnology company focused on the discovery, development and commercialization of novel technologies to support cognitive function and other normal health challenges associated with aging.”

The original complaint dealt with Quincy’s flagship product, Prevagen, which the company had been marketing as a memory-improvement supplement. Quincy bolstered these claims with what it called the Madison Memory Study, which it claimed was “a landmark double-blind and placebo controlled” study.

Post Hoc or Ad Hoc?

The heart of the complaint was an analysis of the aforementioned study, which hinged on Quincy’s sampling of the data. The original study conducted by Quincy, the FTC argued, failed to establish that Prevagen provided any statistically significant memory benefit. Regardless of this finding, the Commission asserted, Quincy went ahead and made claims based on the results of “more than 30 post hoc analyses” of the main study data. The Commission alleged that by dividing the original study data into smaller chunks, the analyses allowed Quincy to dodge the rigor of the larger data sets in the main study – even though the sample size of the post hoc analyses flooded the claims with statistical noise and rendered them unreliable.

In September 2017, the Southern District of New York dismissed the case, arguing that although the FTC had raised the possibility that the post hoc analyses were flawed, it hadn’t presented evidence that they were actually compromised.

The Takeaway

The case was kicked up to the Second Circuit, an appeal that inspired several amicus briefs, including an effort by Truth in Advertising Inc. that we covered back in March of last year.

The circuit court vacated the case and remanded it to the Southern District. “The FTC has stated a plausible claim that Quincy’s representations about Prevagen are contradicted by the results of Quincy’s clinical trial and are thus materially deceptive in violation of the FTC Act and New York General Business Law,” it wrote. Specifically, the court considered the contradiction between Quincy’s claim that Prevagen improved memory function within 90 days and the FTC’s finding that the Madison Memory Study “failed to show a statistically significant improvement … .”

The court also found plausible the FTC’s allegations regarding the ineffectuality of Prevagen’s main ingredient, apoaequorin, which the Commission claimed “is rapidly digested in the stomach and broken down into amino acids and small peptides like any other dietary protein.”

The court left a door open for Quincy, however, noting “that Defendants-Appellees have raised several grounds for affirmance that the district court did not consider. We express no opinion on these arguments, and the district court may consider them in the first instance on remand.”

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New FCC Enforcement Powers Follow Passage of Anti-Spoofing Law

Text message and foreign-call spoofers, beware

Brother Ray

For a hot minute, at least, we’re going to talk about the Repack Airwaves Yielding Better Access for Users of Modern Services Act of 2018, or the RAY BAUMS Act.

Who was Ray Baum, you might ask, besides the recipient of an incredibly ham-handed acronymic compliment?

Baum was an Oregon politician, a member of that state’s house of representatives and its majority leader, a lobbyist, and a public servant. Among the many roles he performed in a long and storied career, he served as senior policy adviser to the U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Communications and Technology (there’s no good acronym for that).

Baum passed away in early 2018, a well-admired bipartisan figure. Officials and businesspeople including Federal Communications Commission (FCC or Commission) Chairman Ajit Pai offered praise for Baum’s career and character.

Hence the namesake, a grab bag of a bill that reauthorized the FCC and tackled several Commission reforms and spectrum-access issues, including the establishment of a new Broadcast Repack Fund that will cover several radio and television station relocations. The bill became law at the end of March 2018.

The RAY BAUMS Act has been commended as a rare bipartisan effort. As one industry outlet put it, “From the many, and mostly glowing, floor speeches in advance of the vote, there was the definite sense that Baum’s spirit of bipartisanship and consensus, plus his hard work on the issues addressed, helped power the compromise on the bill that resulted in passage.”

Well done, Ray.

The Takeaway

So, why is the act important?

The RAY BAUMS Act extends an important provision of the Truth in Caller ID Act of 2009. That act forbade the transmission of misleading or inaccurate caller ID information “with the intent to defraud, cause harm or wrongly obtain anything of value” – the practice known as “spoofing.” The RAY BAUMS Act extends the same prohibition to text messages and international calls, a new initiative that the FCC has taken on in the hope of reducing instances of illegal spoofing.

According to the Commission, combating unwanted calls is “the agency’s top consumer protection priority.”

Anyone who has been plagued by sales or scam calls in the past few years knows that many of these calls are made from outside the United States. The RAY BAUMS Act will help the Commission expand its enforcement activities against a whole new population of spoofers.

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Shopper Doesn’t Dig Kate Spade’s Reference Pricing

Outlet-only products aren’t, by definition, discounted, says plaintiff

Brag Bag

Kate Spade New York, a fashion brand that has defined urban cool for almost two decades, began as an unfunded startup run by a husband-and-wife duo in 1993. When the pair sold the company to Liz Claiborne in 2006, the company was worth $124 million; when it was sold to Tapestry Inc. in 2017, it was valued at $2.4 billion.

Not bad for an upstart family business.

With the enormous success of the brand, Kate Spade outlet stores opened nationwide, selling the company’s ubiquitous handbag lines as well as several lines of accessories and apparel.

If a Discount Falls in the Forest …

One of those outlets is the epicenter of a recent class action lawsuit brought by San Diego shopper Kristen Schertzer, who went after Kate Spade in California’s Southern District in February 2019. According to Schertzer’s allegations, the company was in the habit of creating a fictitious reference price on the tag of the product, which it labeled as “our price.” It then used signage near the product to offer steep discounts (in Schertzer’s story, up to 70 percent off).

“However, the reference price is total fiction,” Schertzer claimed.

The Takeaway

Schertzer is suing the company for violation of California’s Unfair Competition Laws, False Advertising Law and Consumer Legal Remedies Act. She argues that Kate Spade’s allegedly false reference pricing “is a sham price disparity that misleads consumers into believing they are receiving a good deal and induces them into making a purchase.” Schertzer requests that the court halt Kate Spade from using this pricing mechanism and enjoin the retailer from making allegedly misleading price comparisons in its labeling and advertising.

While Schertzer outlines a detailed investigation into the prices and pricing practices of Kate Spade, one of her assertions about the company’s approach is interesting, specifically as it relates to the relationship between the reference price and sale prices displayed on outlet merchandise.

“The merchandise sold at Kate Spade outlet stores is created specifically for Kate Spade outlet stores,” Schertzer notes. “Thus, the only market price for the Kate Spade outlet store merchandise is the price at which the merchandise is sold at the Kate Spade outlet stores.” Because the Kate Spade outlets feature exclusive products, Schertzer argues, in the absence of a historical price drop, the reference price and the sales price must be the same categorically.

Food for thought for outlet operators.

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Feds Want the Cookie to Crumble

Settlement in misleading label action unfair to class members, says DOJ

Dapibus Populo

Lenny & Larry’s is a fun brand – bold, colorful packaging with a distinctly ’80s palette, goofy brand icon featuring the woofed-out hair of the founders, and lots of exclamation points in the copy.

Is all this zip deployed because it’s selling a product that is so relentlessly healthy? As the company website puts it: “Lenny & Larry’s The Complete Cookie® forms the foundation of a whole new category of food: Baked Nutrition®. Vegan, Kosher, and Non-GMO … .”

In addition to its Complete Cookies, the company also hawks a “Muscle Muffin” and a “Muscle Brownie.” Its entire line is pitched as “a better way to get more protein in your diet while enjoying something tasty.”

Just the Snacks, Ma’am

But when a pair of consumers from Michigan and Illinois sued Lenny & Larry’s in 2017, their accusations struck at the heart of the company’s identity. Over the course of three amended complaints (the final landed in March 2018), the evolving group of class plaintiffs accused the company of mislabeling its products so that they appeared healthier than they are, such as by allegedly misrepresenting the number of calories and amount of fat and protein the products contained. The plaintiffs also alleged that Lenny & Larry’s testing methodology was flawed and not in compliance with various federal and state testing regulations. “Based on Plaintiffs’ testing,” the final complaint claimed, “the Product generally contain [sic] 40%-50% less protein than stated on the label. Defendant has also misrepresented other key nutrients in the Product, including the total calories, carbohydrates, fats and sugars.”

The parties wrangled for a few more months in the Northern District of Illinois and reached a $5 million settlement in October 2018.

And then the feds showed up.

The Department of Justice (DOJ or Department) filed a statement of interest with the court in February 2019 alleging that the settlement was unfair to class members. The DOJ claimed that the majority of the cash settlement funds were set to go to the class counsel and amounted, in the final analysis, to a marketing opportunity for the cookie makers. Specifically, the DOJ took issue with the fact that the bulk of the nonmonetary award would “consist of free cookies the defendant plans to send to vendors across the country … .”

For the record, the DOJ is notified about all proposed class action settlements – a requirement of the Class Action Fairness Act of 2005 (CAFA). “While the CAFA notice provision does not expressly grant specific authority or impose explicit obligations upon federal or state officials,” the Department wrote in the statement, “the Act’s legislative history shows that Congress intended the notice provision to enable public officials to ‘voice concerns if they believe that the class action settlement is not in the best interest of their citizens.’”

The Takeaway

And voice them it did. The Department claimed that the settlement, which involved 90,000 class members, was divided in such a way as to leave the 70,000 members who opted for cash payments out in the cold. Of the original $5 million, $3.15 million had been set aside as a “large cy pres distribution of free cookies to vendors who already sell defendant’s products … .” That left about $1.85 million on the table.

But class counsel was asking for $1.1 million in fees. After other costs, only $350,000 remained for the class members who wanted cash. “A class member who submitted a claim with proof of purchase for $50 likely would receive roughly $25,” the department claimed. “A class member without proof of purchase seeking the standard $10 claim would instead receive about $5. This pro rata reduction ‘dramatically reduce[s]’ the settlement’s ‘apparent value.’”

Lawyers for Lenny & Larry’s told the press that the issues raised by the feds were already being addressed by the company and the plaintiffs before the statement was issued. Pursuit of a settlement restructuring is in the hands of the district court; we’ll watch with interest for its response.

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Speaker Spotlight

Association of National Advertisers’ 2019 Advertising Law & Public Policy Conference, Washington, D.C.

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.

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