Alerts

AD-ttorneys@law - November 30, 2017

Alerts / November 30, 2017

In This Issue:

Fidget Spinner Company Too Distracted to Respond to Health Claim Inquiry

NAD kicks silent GetLitShoes.com upstairs to the FTC

Rubik’s Redux?

Once completely obscure, fidget spinners are now a thing. Meaning that their existence, if not their actual purpose, has become known to you.

Dubbed by The New York Times “a Hula Hoop for Generation Z,” the fidget spinner has become ubiquitous in 2017, with all the attendant trappings of a runaway fad: hip underground status, explosive growth and sold-out supplies, think pieces on fidget-spinner significance, a pseudo-culture built around the product, and an inevitable, angry backlash.

Promises, Promises …

The popularity of the product relied, in part, on supposed health and therapeutic benefits. Spinners have been marketed as helpful devices for children with autism, anxiety and attention deficit hyperactivity disorder (ADHD). In the case of fidget spinner manufacturer GetLitShoes.com, these claims caught the eye of the National Advertising Division (NAD), which launched an inquiry.

The company marketed its AMILIFE EDC Fidget Spinner products with a number of health-related claims, including “ADHD Focus Anxiety Relief Toys,” “Relieving ADHD, OCD, Anxiety, Stress …” and “Great for anxiety, focusing, ADHD, autism …”

NAD requested substantiation of these and other claims that the fidget spinner products will relieve health conditions.

The Takeaway

NAD claims that GetLitShoes.com declined to respond to several contact attempts. In late October 2017, NAD took the next step and referred the matter to the Federal Trade Commission (FTC or Commission) for review. The Commission responded on November 16, 2017 that its investigation found the website was no longer in operation. Upon finding that GetLitShoes.com was not currently advertising the product it found that no action was warranted. The FTC thanked NAD for the referral and affirmed its support of NAD and the self-regulatory process. The FTC relies on the self-regulatory process to relieve its caseload and generally takes up cases referred to it from the NAD in order to encourage advertisers to participate in voluntary NAD inquiries.

The backlash against the spinners proceeds apace, with teachers on the front lines, confiscating spinners and actually blaming them for increased classroom distraction. While some parents sing the spinners’ praises for providing stress relief and building concentration, at least one medical doctor held otherwise. Mark Rapport, M.D., director of the Children’s Learning Clinic at the University of Central Florida’s Department of Psychology, told the Daily Mail that “using a spinner-like gadget is more likely to serve as a distraction than a benefit for individuals with ADHD.”

LuLaRoe Sales Structure Clashes With Official Retailers

Two class actions target the clothier’s sales structure, guarantees

Power to the Pencil Skirt

LuLaRoe markets itself as a movement, not merely a clothing line. The manufacturer of boldly colored, patterned skirts and dresses centers its business on its affiliate sales program: Individuals throughout the country – LuLaRoe Fashion Retailers – are the only channel for LuLaRoe products. Fashion Retailers buy chunks of inventory and then peddle the LuLaRoe line through “pop-ups” – in-home boutiques – where the Retailer invites friends and acquaintances to scoop up clothes. The line is also sold via online storefronts organized by the Retailers.

The pitch is a straightforward blend of entrepreneurial independence and empowerment. “Becoming a LuLaRoe Fashion Retailer can provide you opportunity to have the means, the time, and the flexibility to pursue your passions and to more fully enjoy the company of those you love,” maintains the LuLaRoe site.

Forever-ever?

But October 2017 was a dark month for the famously sunny clothier.

On Oct. 13, LuLaRoe was hit with a class action lawsuit originated by four plaintiffs, all Fashion Retailers for the brand. The four women claimed that one of the key platforms of the LuLaRoe affiliate structure – the ability to request a 100 percent refund of the wholesale cost of their inventory – had been pulled out from under them.

In the complaint, the plaintiffs describe LuLaRoe’s sales structure, which they maintain requires Retailers to purchase a typical presale inventory of $5,000 to $8,000. They also describe a tiered sales hierarchy, with Retailers encouraged to bring in new recruits to the enterprise. Retailers who attract new Retailers earn higher compensation and bonuses, but are required to maintain even higher levels of inventory.

The plaintiffs allege that LuLaRoe drew in a large number of Retailers on the strength of the company’s 100 percent buyback policy. The policy, initiated in April 2017, was attractive in a situation that was dependent on significant and expanding investment in inventory. Effectively, the policy guaranteed that Retailers could walk away without a loss of their investment should they desire to sever ties with the company. “[Retailers] and the public were assured through a variety of written and oral communications that this policy was never going to expire,” the plaintiffs claim.

Hemmed In

And then, the plaintiffs allege, in September 2017 LuLaRoe altered the buyback policy. Conditions were applied to the buybacks, including a one-year deadline for returns from the date of the original inventory purchase, and a 10 percent markdown of the product’s buyback value, essentially a restocking fee. Retailers would even have to pay shipping, which they had not done before. All these changes were effective retroactively for previous purchases.

This policy change was the center of the suit, which seeks redress for untrue or misleading advertising, and unlawful, fraudulent and unfair business acts and practices in violation of California’s Business and Professions Code; unjust enrichment; and breach of contract, among other charges.

This policy change was the center of the suit, which seeks redress for untrue or misleading advertising, and unlawful, fraudulent and unfair business acts and practices in violation of California’s Business and Professions Code; unjust enrichment; and breach of contract, among other charges.

If the first class action were not enough, a second arrived only 10 days later.

Three plaintiffs, also LuLaRoe Retailers, sued the company under California’s Endless Chain Scheme Law, the Racketeer Influenced and Corrupt Organizations Act, California’s Unfair Competition Law and the state’s Business and Professions Code.

This set of plaintiffs attacked the sales structure itself, claiming that LuLaRoe conned prospective Retailers into joining the sales program by promising “financial freedom,” “part-time work for full-time pay” and rewards including “large bonus checks and other lavish material possessions.”

But the plaintiffs maintained that the sales structure was nothing more than a scheme by which Retailers at various levels of the sales hierarchy were encouraged to bring in new Retailers who would need to purchase new inventory from the company. Actual retail sales were of secondary or no importance to LuLaRoe at all, they claimed, rendering the entire enterprise an enormous pyramid or endless chain scheme.

Among the charges brought by the plaintiffs is a false advertising charge under the California Business and Professions Code for misrepresenting the nature of the alleged pyramid scheme.

In response to one report on the lawsuits, LuLaRoe stated that “our success has made us the target of orchestrated competitive attacks and predatory litigation … We have not been served with the recent complaints, but from what we have seen in media reports, the allegations are baseless, factually inaccurate, and misinformed. We will vigorously defend against them and are confident we will prevail.”

The Takeaway

Multilevel marketing can be structured legally, but if care is not taken in developing the program and its requirements, tiered sales programs that reward recruitment risk crossing the line and becoming illegal pyramid schemes. Changing material terms of sale can also be problematic if applied retrospectively, and even prospective changes may present problems, depending upon what prior assurances had been made.

FDA Harshes Buzz on Cannabis-Based Cancer Cure Claims

Will an intensifying Administration effort make companies paranoid?

Warning Shot

On Nov. 1, 2017, the Food and Drug Administration (FDA or Administration) issued warning letters to four companies – Greenroads Health, Natural Alchemist, That’s Natural! Marketing and Consulting and Stanley Brothers Social Enterprises, LLC – referencing advertising regarding the health benefits of more than 25 of their products.

The claims, made in online stores and on social media websites, connect a common ingredient – cannabidiol (CBD), “a component of the marijuana plant that is not FDA approved in any drug product for any indication” – with positive results in cancer patients. The advertising targeted by the Administration includes phrases like “CBD makes cancer cells commit ‘suicide’ without killing other cells” and “combats tumor and cancer cells.”

Misdirection?

The problem, the FDA asserts in a summary press announcement, is that there is no substantiation that CBD has any effect on cancer. The companies are “illegally selling products online that claim to prevent, diagnose, treat, or cure cancer without evidence to support these outcomes.” The Administration makes clear that selling products that make these claims without substantiation is a violation of the Federal Food, Drug and Cosmetic Act.

Beyond the illegality of the product claims, the FDA expresses concern that reliance on the products may cause cancer patients to miss out on other, established treatment options. “We don’t let companies market products that deliberately prey on sick people with baseless claims that their substance can shrink or cure cancer, and we’re not going to look the other way on enforcing these principles when it comes to marijuana-containing products,” said FDA Commissioner Scott Gottlieb, M.D.

The Takeaway

The FDA is promoting the CBD-related warning letters as yet another front in its intensifying war against products making insubstantial cancer-treatment claims. The Administration notes in its announcement that it has issued more than 90 such warning letters in the past 10 years – and that more than 12 of those letters have been issued in the past year alone.

Phantom Craigslist Ads Lure Consumers, Says FTC

Hopeful apartment renters unknowingly sign up for monthly charges

Another Headache

Anyone who’s ever searched for housing – pretty much anyone reading these words – knows the trials and tribulations of the process. The perfect apartment that gets snatched away. The affordable flat that winds up packed with hidden fees. The endless parade of brokers, landlords, potential roommates … It’s exhausting.

And for a number of hopeful renters across the country, this tedious process became even more difficult. According to a complaint filed by the Federal Trade Commission (FTC or Commission) in January 2017, Credit Bureau Center, LLC, a Delaware-based corporation, and three individuals related to the company had engaged for three years in an underhanded scheme to enroll prospective renters in a monthly credit fee service, allegedly without their knowledge.

Step This Way, Please …

The alleged scheme was simple. Two of the named defendants created Craigslist ads offering apartments for rent. When targets replied to the ad, a landlord would reply, letting the target know that the renter that had previously been promised the apartment had given it up, thus opening a great opportunity to snag the apartment immediately. And these were impressive apartments: freshly renovated, with new appliances, and utilities and parking garage fees priced into the advertised monthly rent.

There was, of course, just one thing the target needed to do before touring the property: provide a credit score. The target was instructed to visit a website where he or she would be walked through a credit report application; a handy link was included in the email. The prospective new renter would click through to the credit reporting site and provide the relevant personal and financial information.

There was one problem – the landlords didn’t exist. Neither did the properties. Both, claimed the Commission, were chimeras created by the defendants to lead unsuspecting targets to the credit scoring website. And once the targets’ information was logged, the site began charging them $29.94 a month for their “service.” But the tour of the property itself never materialized.

The Takeaway

This alleged scam generated quite a response – more than 500 consumer complaints and millions of dollars of consumer loss, according to the complaint. Once the FTC turned its attention to the scam, the Commission launched its complaint, pursuing various combined violations of the FTC Act, the Restore Online Shoppers’ Confidence Act, the Fair Credit Reporting Act and the Free Reports Rule.

A recent court order issued by the Northern District of Illinois, Eastern Division, resolved the case in part. Two of the individual defendants, affiliate marketers who organized the fake Craigslist ads and landlord emails, are prohibited by the order from misrepresenting products and services, and are bound by certain guidelines when engaging in marketing projects. They were also prohibited by the order from profiting off of their targets’ personal information. The $6.8 million judgment will be suspended in part once certain payments are made by the defendants.

The case against Credit Bureau Center – the company that ran the credit report websites – and the remaining individual is still ongoing.

Appellate Decision Keeps CDA ‘Safe Harbor’ Open

1st Circuit says publisher is not a content provider despite copyright claims

Accuse-o-rama

Designed in a garish red and black theme, with headings like “Victim of a consumer Rip-off? Want justice?,” RipOffReport.com makes a strong impression. It is, after all, appealing to an upset crowd – consumers who feel they have suffered at the hands of companies or individuals. The site is designed to receive “reports” from consumers documenting their complaints.

RipOffReport.com positions itself as a research tool to help consumers investigate businesses prior to striking up a relationship with them. But it also advances itself as a catalyst for class action lawsuits and investigations: “Your information may aid in pursing civil or criminal proceedings against companies engaged in wrongdoing.”

Ominous, however – at least for the companies who are targeted by the site’s reports – is a link that reads, “If you are considering filing a lawsuit against Rip-off Report, click here for important information about applicable federal law. Do you really want to sue Rip-off Report? … you really need to read this link.”

The link leads to a long webpage, replete with a table of contents that outlines information about the futility of pursuing legal action against the site. The centerpiece of this tract is a lengthy discussion of the Communications Decency Act (CDA), which RipOffReport.com clearly sees as key to its defense against lawsuits from disgruntled companies.

Cover

The CDA has been wielded successfully by RipOffReport.com’s parent company, Xcentric, for a while now. A string of suits against Xcentric and its founder, Ed Magedson, about the content posted by consumers to the site have been dismissed under the CDA.

The CDA makes a crucial distinction between interactive computer services (ICS) that host content – websites, for example – and information content providers (ICP), the parties that actually post or otherwise provide content to the ICS. Under the CDA, an ICS is not “treated as the publisher or speaker of any information provided by another information content provider.” Thus, Xcentric has escaped quite a number of suits by relying on its status as an ICS, rendering itself untouchable in cases where defamatory material against a plaintiff was posted to its site by a third party.

Latest Iteration

This approach was reinforced yet again by a 1st Circuit opinion issued on Oct. 11, 2017.

The facts of the case had their roots in a separate and unrelated lawsuit, wherein Massachusetts attorney Richard Goren sued an individual under state law over two negative reports about Goren that he posted to RipOffReport.com. Goren won a default judgment that awarded him copyright over the negative reports.

Once this victory was in place, Goren opened a federal suit in Massachusetts, claiming that Xcentric was infringing on his copyright by keeping the posts active on the site. Goren sought equitable relief and damages, including a declaratory judgment that he owned the copyright to the posts in question, and injunctions that would prevent the company from “continuing to publish, and/or from republishing all or any part” of the two reports.

Xcentric moved to dismiss, arguing that the CDA protected its right to publish and maintain the reports. Goren’s counsel made an interesting counterargument – because RipOffReport.com asks posters to sign over their rights to their reports, Xcentric was responsible for the reports in question. It was in effect both the service provider and the content provider. Additionally, Xcentric worked hard to have its reports perpetuated over internet search engines – another form of publishing. If Xcentric was responsible for the content, it couldn’t use the CDA to get out from under the suit. The District Court ruled against Goren, who appealed to the 1st Circuit.

The Takeaway

The appellate court affirmed the dismissal, arguing that the immunity from libel and tort claims afforded to an ICS under the CDA should be broadly construed: “We noted [in an earlier decision] that Congress has expressed a ‘policy choice … not to deter harmful online speech through the … route of imposing tort liability on companies that serve as intermediaries for other parties’ potentially injurious messages.’”

The 1st Circuit held that to identify Xcentric as both ICS and ICP would “flout Congress’s intent by wrongly preventing an ICS like Xcentric from claiming immunity.” The opinion also noted a 9th Circuit decision that rejected the notion that an “ICS, by merely providing such direction to search engines with respect to information the ICS has not altered, becomes an ICP of that information.”

The opinion of the appellate court in this case sets yet another protective boundary around immunity offered to an ISC by the CDA.

Turning to Goren’s copyright claim, the 1st Circuit agreed with the District Court that when the individual who first posted the reports did so, he granted Xcentric a perpetual and irrevocable license to publish and distribute the posts that was still valid. This illustrates the importance of online terms of use and submission terms for publishers of user-generated content.

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.