Ad Law Access https://www.kelleydrye.com/viewpoints/blogs/ad-law-access Updates on advertising law and privacy law trends, issues, and developments Thu, 16 Nov 2023 08:47:42 -0500 60 hourly 1 Neora Prevails In Landmark Decision For Direct Selling Industry https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/neora-prevails-in-landmark-decision-for-direct-selling-industry https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/neora-prevails-in-landmark-decision-for-direct-selling-industry Fri, 29 Sep 2023 09:41:00 -0400 Big, BIG win for the direct selling industry, as Judge Barbara Lynn (N.D. Texas) grants judgment for Neora, LLC (formerly Nerium) on all of the FTC’s claims, including that the company was operating an illegal pyramid scheme and made deceptive income and product claims (both directly and through its distributors). Expect the FTC to gather itself and explain that this is one district court case before one judge. But make no mistake about it, Judge Lynn (Clinton appointee) is a respected jurist, with a reputation of being thorough and well-prepared. This decision leaves a mark.

Illegal Pyramid Scheme?

As expected, the pyramiding claim turned on the second element of the Koscot test—the right to receive rewards that are unrelated to the sale of product to ultimate users, in exchange for recruiting other participants into the program. The court rejected the FTC’s expansive interpretation, which relied on the assumption of its expert witness and outspoken critic of the direct selling industry, Dr. Stacie Bosley. Dr. Bosley contended that purchases by Brand Partners (Neora distributors) are not sales to ultimate users. Dr. Bosley’s assumption was almost entirely based on the face of Neora’s compensation plan, which required (among other things) recruitment in some form to be eligible for many bonuses.

Distinguishing Neora from Vemma and BurnLounge where that assumption (including by Dr. Bosley in Vemma) was more persuasive, Neora presented evidence that sales revenue drove the business. Among this evidence, the court highlighted sales data, a survey of Brand Partners, and evidence showing that many Brand Partners enrolled for product discounts. Although not enough to establish the motivations of all Brand Partners, it was enough to rebut Dr. Bosley’s testimony—which the court framed as asking it to “slavishly look only to the compensation plan in isolation, with blinders on to the actual operational data and internal structure of [the] business.”

[Industry observers have nodded in agreement with this view as this argument has been advanced by Neora, while scratching their heads at the FTC’s narrow focus on the wording of the compensation plan.]

As the court put it in criticizing the FTC’s evidence and emphasizing what it perceived as a significant hole in the FTC’s case: “The FTC provided no evidence from actual BPs or participants, and made no effort to show that Dr. Bosley’s rigid theoretical opinions regarding BP purchasing motivations based on the Compensation Plan are borne out in reality.” Judge Lynn was unpersuaded by the FTC’s reliance on profitability data in a vacuum or that distributors who do not earn compensation are failed distributors, emphasizing that people may enroll as savings seekers looking to enjoy product discounts with no intention of pursuing the business opportunity: “Put differently, we may ‘walk away poorer than we started’ after a trip to the grocery store, but because we obtained valuable goods or services in return for our money, that exchange is not characterized as a loss.”

Income and Product Claims

The FTC has long asserted that its authority to prevent and remedy unfair and deceptive acts or practices encompasses actions against companies for failure to sufficiently monitor affiliates, agents, or other entities that used a company’s services or otherwise had a relationship with the company.

The FTC has relied on this authority as it pursued enforcement against companies under similar third party liability theories in a number of contexts, including: (1) claims made by independent distributors or influencers on behalf of a company when the company knew or should have known about the claim; (2) payment processers and money facilitators; (3) debt collection agencies; (4) franchise operators; (5) affiliate marketers; and (6) providers of telemarketing services and equipment. And while the FTC’s authority to bring such cases has not been extensively challenged, courts have upheld the agency’s capacity to bring these actions on the grounds that unfairness under the FTC Act includes instances where an entity facilitates or provides substantial assistance to another’s deceptive or unfair act or practice.

Well, Judge Lynn was not convinced that the line between distributor and company had been crossed. Once again, the court noted that the FTC failed to provide evidence that customers understood that Brand Partners were agents of Neora. She also credited Neora’s “rigorous compliance program” while quoting FTC guidance acknowledging that direct selling companies cannot possibly monitor every claim that is made by independent distributors in the field. This part of the decision is especially noteworthy given its focus on the importance of compliance programs—with an emphasis on training, monitoring, and enforcement—as well as continuing efforts to align company practices with the law as it develops and guidance provided through industry self-regulation. (Nicely done, Direct Selling Self-Regulatory Council.)

With regard to income claims, specifically, the court noted that Neora did not “guarantee any level of income for any Brand Partner,” disclosed typical earnings in its Income Disclosure Statement, and included the qualification that “the actual income of Neora Brand Partners varies.” With regard to product claims, the court ruled that there is no evidence that Neora is currently making claims that their products cure, treat, or prevent human disease. As a result, the court concluded that “enjoining Defendants and Neora’s BPs from making misleading income and product claims would have no effect beyond which is already being achieved through Defendants’ robust and reasonable compliance program, and thus an injunction is not warranted.”

What’s Next?

There will be a big sigh of relief (and some well-deserved crowing) by the direct selling industry, and of course, Neora, given what was at stake. Had the FTC won, the bar would have been raised to a dizzying height. But we have seen this before, most recently following the Supreme Court ruling in AMG Capital Management. After what seemed like a mortal blow to the FTC’s authority, the agency picked itself off the mat and responded: Notice of Penalty Offense Authority, the stretching of existing statutes, Section 19, collaboration with States, and on and on. What’s more, the court here emphasized the FTC’s failure of proof—that is, holes in the Agency’s case. Do not expect this mistake twice.

Having said that, however, and anticipating the familiar one-judge, one-court refrain, the magnitude of this decision cannot be overstated. It reinforces that sales data remains significant in any pyramiding analysis, permits compensation tied to product use (whether by a distributor or a preferred customer), recognizes the value “savings seekers” receive without earning any profit, and emphasizes that proactive compliance measures and a recommitment to best practices really do matter.

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FTC Advises Companies to Remediate Log4j Vulnerability https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ftc-advises-companies-to-remediate-log4j-vulnerability https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ftc-advises-companies-to-remediate-log4j-vulnerability Wed, 12 Jan 2022 14:19:10 -0500 FTC Advises Companies to Remediate Log4j VulnerabilityIn an unusual warning to companies running Java applications with Log4j in their environments, the Federal Trade Commission (FTC) recently cautioned that it “intends to use its full legal authority to pursue companies that fail to take reasonable steps to protect consumer data from exposure as a result of Log4j[] or similar known vulnerabilities in the future.” All companies with consumer information should take heed, assessing information security risks on their systems and devices and implementing policies to guard against foreseeable risks.

What prompted the FTC’s action?

The Apache Log4j software library is a ubiquitous Java-based logging utility. In December, the Cybersecurity and Infrastructure Security Agency (CISA) cautioned that a critical vulnerability in this popular open-source software rendered “hundreds of millions” of internet-connected devices vulnerable to attack. CISA’s Director advised that the software’s ubiquity makes the scale and potential impact of the vulnerability significant. CISA gave federal agencies until December 24, 2021, to patch the vulnerability or implement other mitigating measures.

A variety of executive branch agencies, including CISA and the White House’s National Cyber Director, promoted the FTC’s warning on social media. The FTC’s warning can be viewed as reiterating the FTC’s longstanding approach to data security (that companies must implement reasonable steps to protect consumer information from unauthorized disclosure or misuse) while simultaneously suggesting that a failure to protect against the Log4j vulnerability is per se unreasonable. The warning references the FTC’s $700 million 2019 settlement with Equifax Inc., in which the FTC alleged among other things that the company’s failure to patch a known vulnerability contributed to exposure of millions of consumers’ personal information. The FTC also notes that it is critical for companies and their vendors who rely on Log4j to act now, “in order to reduce the likelihood of harm to consumers, and to avoid FTC legal action.”

Legal context

As we’ve addressed here, there is no single federal data security law in the United States requiring companies across the marketplace to implement a uniform set of data security measures. Nonetheless, the FTC’s warning—which goes further than prior FTC business guidance like Start with Security or Stick with Security—asserts that existing laws, including the FTC Act and the Gramm Leach Bliley Act, create a duty for companies to take reasonable steps to mitigate known software vulnerabilities.

Why does this matter for companies with consumer data?

The FTC’s warning reaffirms that data security enforcement remains a priority for the current Commission’s leadership. In addition, the FTC post relays the Commission’s intent to consider the “broader set of structural issues” related to “open-source services,” which it considers to be among the “root issues that endanger user security.” This seems to be a callback to Chair Khan’s strategic vision for approaching competition and consumer protection “holistically” and focusing on what the Commission regards to be “root causes” of harm.

The FTC’s admonitions remind every company with consumer information to assess the risks to that information in their environments and in vendor environments and implement reasonable policies to guard against those risks.

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Please join us for State Attorney General Consumer Protection Priorities for 2022. This webinar will provide discussion and practical information on the topics mentioned above and other state consumer protection, advertising, and privacy enforcement trends. Register here.

Also join us for Privacy Priorities for 2022: Legal and Tech Developments to Track and Tackle, a joint webinar between Kelley Drye’s Privacy Team and Ketch, a data control and programmatic privacy platform. This Data Privacy Week webinar will highlight key legal and self-regulatory developments to monitor, along with practical considerations for how to tackle these changes over the course of the year. This will be the first in a series of practical privacy webinars by Kelley Drye to help you keep up with key developments, ask questions, and suggest topics that you would like to see covered in greater depth. Register here.

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Some fireworks at Bedoya’s Senate confirmation hearing, but confirmation still seems likely https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/some-fireworks-at-bedoyas-senate-confirmation-hearing-but-confirmation-still-seems-likely https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/some-fireworks-at-bedoyas-senate-confirmation-hearing-but-confirmation-still-seems-likely Thu, 18 Nov 2021 13:49:55 -0500 On November 17, the Senate Commerce Committee held its eagerly-awaited hearing on the nomination of Alvaro Bedoya, a data privacy academic from Georgetown Law, to be FTC Commissioner. Bedoya is slated to replace Rohit Chopra, who departed the agency last month to become Director of the CFPB, and Bedoya’s appointment would once again give the Democrats a voting majority. In the run-up to his hearing, some have wondered – Can we expect Bedoya to provide Chair Khan with a reliable third vote for her agenda, or will he bring a more bipartisan approach to the agency? From his answers and demeanor at the hearing, the answer is probably…both.

First, a little table-setting: Bedoya’s nomination was considered along with three others – Jessica Rosenworcel for FCC Chair and two nominees for the Department of Commerce. The hearing was well-attended by Committee members, who directed the majority of their questions to Rosenworcel. (Yes, net neutrality, broadband access, and the “homework gap” all got more attention than privacy.) All four current FTC Commissioners attended the hearing in person, in a bipartisan show of support for Bedoya, though Bedoya attended remotely due to a recent exposure to COVID.

Here are some takeaways from Bedoya’s portion of the hearing.

  • He appears likely to be confirmed, even if largely along party lines. Although Senator Wicker made a reference to Bedoya’s “strident” views and Senators Lee, Cruz, and Sullivan slammed his “extremist” tweets (see below), most of the questions (from 18 Senators!) related to Bedoya’s area of expertise (privacy), where there is more alignment between the parties than in other areas. He handled the questions well, and repeatedly expressed support for collaboration and bipartisanship (e.g., specifically mentioning that he wants to work closely with Commissioner Wilson on privacy). Democrats have the votes (in the Committee and on the Senate floor), even if they ultimately have to call in V.P. Harris to break a tie.
  • He spoke about his nomination and the issues in personal and emotional terms. Bedoya highlighted that he and his family were welcomed into this country 34 years ago. He talked about his experience as a Senate staffer, learning about the terror and harm caused by stalking apps from a shelter for battered women. He realized then and believes now that “privacy is not just about data, it’s about people.” His goal as a Commissioner would be to make sure the FTC protects people, and to help both consumers and businesses manage the multiple crises facing the country – a COVID crisis, a privacy crisis, and a small business crisis.
  • He appears likely to vote with the majority on many (or most) issues. No big surprise here, but when asked his views about various issues, he consistently supported positions that Khan, Slaughter, and (his predecessor) Chopra have supported – federal privacy legislation, Magnuson-Moss privacy rulemaking if Congress doesn’t act, pushing back against the “unprecedented consolidation” that is forcing small businesses to close, streamlining the FTC’s rulemaking and subpoena processes, reducing the power of the platforms, and reining in tracking technologies like facial recognition. As to the latter, he said he would not support banning facial recognition technologies altogether, since some applications assist with benefits like public safety and healthcare. However, he would support banning facial recognition technologies that are hidden, that lack consent, or that collect, use, and share data without limits.
  • He’s a real-live privacy expert. He clearly has the credentials, starting with his work as a Senate staffer and continuing through his years at Georgetown Law as a professor and head of a privacy think tank. But he also quickly and confidently answered all questions related to privacy – from the need for privacy legislation generally, to his views on Senator Schatz’s “duty of loyalty” and Senator Markey’s proposal to amend COPPA, to the lines he would draw on facial recognition (see above).
  • He wrote some controversial tweets, and a number of Republicans seem poised to vote “no” on his confirmation. Senator Sullivan cited a tweet from Bedoya calling the 2016 Republican convention a “White Supremacist rally.” Cruz cited tweets about ICE as a “domestic surveillance agency” and a retweet involving critical race theory and white supremacy. He also called Bedoya a “left wing activist, bomb thrower, extremist, and provocateur.” Lee ran through a series of supposedly “yes or no” questions in rapid succession, and accused Bedoya of being evasive when he tried to qualify his responses. And Wicker referred to Bedoya’s “strident” views, as noted above. As to the tweets, Bedoya apologized, saying that it was “rhetoric” and that he would put aside any partisan views if he became Commissioner. However, these Senators (and perhaps other Republicans) seem poised to vote “no” on Bedoya’s confirmation, and some have said they plan to place a “hold” on the process, which could slow it down.
  • If confirmed, he could help reduce tensions at the Commission. With acrimony among the Commissioners currently at unprecedented levels (see our recent post here), adding Bedoya to the mix could help reduce the tensions (despite the tweets). He’s known to be collegial, he worked across the aisle as a Senate staffer, he repeatedly invoked bipartisanship at the hearing, and all of the sitting Commissioners (Democrats and Republicans) showed up at the hearing to support him. That augurs well for the dynamics at the Commission, even if the votes remain split along party lines.
We will continue to monitor progress on Bedoya’s nomination and post updates as they occur.

Some fireworks at Bedoya’s Senate confirmation hearing, but confirmation still seems likely

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Fixing the Nix: FTC Set to Target Manufacturer’s Warranty Restrictions on Independent Repairs https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/fixing-the-nix-ftc-set-to-target-manufacturers-warranty-restrictions-on-independent-repairs https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/fixing-the-nix-ftc-set-to-target-manufacturers-warranty-restrictions-on-independent-repairs Mon, 26 Jul 2021 10:21:49 -0400 Following the momentum of President Biden’s sweeping competition executive order, the FTC now wants in on the action. In a unanimous vote, the Commission approved to adopt a policy statement calling for more aggressive enforcement against manufacturer restrictions that prevent consumers and businesses from repairing their own products. The policy statement also pushes for more enforcement of the Magnuson-Moss Warranty Act, which restricts a company from tying a warranty to the use of a specific service provider.

This policy statement flows from a two year process. As we have previously reported, in 2019, the FTC called for public comment and empirical research on repair restrictions, and in May 2021, the FTC released its “Nixing the Fix” report to Congress. Based on those results, the FTC issued this statement that it will now “prioritize investigations into unlawful repair restrictions under relevant statutes such as the Magnuson-Moss Warranty Act and Section 5 of the FTC Act.”

In her prepared remarks before the vote, Chair Lina Khan stated that repair restrictions “can significantly raise costs for consumers, stifle innovation, close off business opportunity for independent repair shops, create unnecessary electronic waste, delay timely repairs, and undermine resiliency.” She expressed that the FTC “has a range of tools it can use to root out unlawful repair restrictions” and called on the public to submit complaints about potential violations.

Commissioner Chopra echoed Khan’s sentiment and recommended that the Commission take steps in addition to reinvigorating enforcement: (1) engage the independent repair community, and conduct a close review on the user experience on reportfraud.ftc.gov; (2) work with other agencies to reform existing procurement policies that allow contractors to block government buyers from self-repair or seeking third-party repair services; and, (3) assist policymakers, including at the state level, to draft Right-to-Repair laws.

All companies offering a product warranty should review its terms, particularly any terms limiting repairs under the warranty. As we are bound to see more activity on the state and federal levels with right to repair legislation and enforcement, we will continue to monitor these developments.

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Ad Law Access Podcast – What to Expect in Consumer Financial Protection and FinTech in 202‪1‬ https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/what-to-expect-in-consumer-financial-protection-and-fintech-in-2021 https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/what-to-expect-in-consumer-financial-protection-and-fintech-in-2021 Tue, 23 Feb 2021 08:00:08 -0500 Ad Law Access PodcastOften when people think about the Consumer Financial Protection Bureau (CFPB) they say to themselves, “well, I’m not a bank so that doesn't really apply to me.” But consumer financial protection laws are actually much broader and cover all aspects of consumer financial products, any way that consumers bank, pay, or finance transactions and the financial technology sector more broadly.

On this episode of the Ad Law Access Podcast, partner Alysa Hutnik and special counsel Donnelly McDowell discuss consumer financial protection, fintech, financial services, and the consumer protection issues that the CFPB and FTC have broad discretion over.

Listen on Apple, Spotify, Google Podcasts, SoundCloud, via your smart speaker, or wherever you get your podcasts.

For more information on consumer financial protection and other topics, visit:

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The FTC Reargues its 13(b) Case, While Congress Appears Set to Enhance the SEC’s Ability to Seek Disgorgement, Suggesting A Legislative Push on 13(b) Next Session https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/the-ftc-reargues-its-13b-case-while-congress-appears-set-to-enhance-the-secs-ability-to-seek-disgorgement-suggesting-a-legislative-push-on-13b-next-session https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/the-ftc-reargues-its-13b-case-while-congress-appears-set-to-enhance-the-secs-ability-to-seek-disgorgement-suggesting-a-legislative-push-on-13b-next-session Fri, 04 Dec 2020 17:40:01 -0500 Earlier this week, the Federal Trade Commission re-stated its position to the Supreme Court, arguing that there is no "clear legislative command" to restrict the traditional powers of equity. In other words, courts of equity could do just about anything, and since an injunction is equitable relief, an injunction can equal monetary restitution as well. No real surprises here.

But the obvious problem remains: that's not what the statutory text says. And we are not in a court of equity, but a court of law, dealing with a statutory provision that allows for injunctions and does not allow for monetary remedies. With argument set before an increasingly textualist Supreme Court in mid-January, the judicial field seems tilted in the wrong direction for the FTC.

Which very well means that the real fight will come later, in Congress. And while we wait for the Supreme Court’s decision to clarify the FTC’s enforcement authority, it is unclear how long that clarification will stick. In considering this issue, it is useful to consider Congress’s pending action to clarify the penalty authority of another independent agency, SEC, an effort that is gathering some steam.

As part of its annual defense policy bill, Congress is poised to enhance the SEC’s ability to pursue violations of the securities laws. Specifically, Section 6501 of H.R. 6395, the FY21 National Defense Authorization Act (NDAA) – as agreed to by House and Senate negotiators – would provide statutory authority for the SEC to seek disgorgement as a remedy for unjust enrichment gained through a securities law violation. The bill establishes up to a 10-year statute of limitations for disgorgement and a 10-year statute of limitations for equitable remedies.

Section 6501 of the defense bill largely mirrors Title V of Senator Mark Warner’s (D-VA) anti-money laundering bill, the ILLICIT CASH Act (S. 2563) (itself incorporated into the defense bill) – although does not include restitution as Warner’s bill does. The language is also similar to H.R. 4344, the Investor Protection and Capital Markets Fairness Act, authored by Representatives Ben McAdams (D-UT) and Bill Huizenga (R-MI). H.R. 4344 passed the House in November 2019 by a vote of 314-95 and was endorsed by SEC Chairman Jay Clayton. We wrote about the prospects for, and broader implications of, these bills in January.

The NDAA – and with it, these new tools for the SEC – is expected to be passed by both chambers of Congress next week, notwithstanding a Presidential veto threat. When it comes to 13(b), however, despite some recent (and mild) momentum, Congressional action to clarify the FTC’s Section 13(b) authority seems far less certain with just a handful of days left this session. But it is certainly something to watch closely once the 117th Congressional session convenes in 2021.

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Section 13 (b)log: Direct Seller Stands Its Ground: Neora Seeks Declaratory Judgment Against the FTC, Challenging the Agency’s Section 13(b) Authority https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/direct-seller-stands-its-ground-neora-seeks-declaratory-judgment-against-the-ftc-challenging-the-agencys-section-13b-authority https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/direct-seller-stands-its-ground-neora-seeks-declaratory-judgment-against-the-ftc-challenging-the-agencys-section-13b-authority Tue, 05 Nov 2019 16:15:50 -0500 The continuing questions over the extent of the FTC’s enforcement authority to obtain monetary relief under Section 13(b) did not stop the Commission from filing a lawsuit on November 1 against multi-level marketer Neora, LLC and its CEO Jeffrey Olson for purportedly operating an illegal pyramid scheme that used deceptive marketing to sell supplements, skin creams and other products.

Pursuant to Section 13(b), the FTC seeks an injunction to stop Neora’s alleged pyramid scheme and an award of restitution to return money to consumers. The lawsuit, filed in the District of New Jersey, alleges that Neora (formerly known as Nerium International) and its CEO offered false promises that potential distributors could earn financial independence if they joined the company’s pyramid scheme – while, in reality, most recruits would end up losing money.

The lawsuit comes as part of the Commission’s larger efforts to crack down on multi-level marketing pyramid schemes. But interestingly, when it saw the lawsuit against it coming, Neora opted to lodge an aggressive attack of its own against the FTC.

In a lawsuit filed in the Northern District of Illinois (Seventh Circuit) against the FTC, Neora and Olson asked the court to declare that its company did not operate as a pyramid scheme. The company’s complaint also asserted that the FTC is not authorized to seek restitution or disgorgement under Section 13(b) – effectively contending that the FTC’s attempt to punish Neora by seeking restitution is not available as a remedy.

So what happens next? As an initial matter, the Department of Justice will have first crack at the case, given that Neora is seeking a declaratory judgment. Regardless of whether DOJ or the FTC leads the government’s response, we would expect a motion for a change of venue from Illinois to New Jersey, with argument that it is not possible to litigate the motion for declaratory judgment without litigating the facts of the underlying case. If the court agrees, the case would be moved to New Jersey where there is binding precedent that is more favorable to the Commission’s position.

Section 13(b) Questioned in the Seventh Circuit

The company’s choice of forum was no doubt driven by the Seventh Circuit’s landmark decision earlier this year in FTC v. Credit Bureau Center LLC. In that case, the Seventh Circuit held that the FTC could not obtain monetary relief in the form of restitution under Section 13(b). The court reasoned that Section 13(b)’s text cites injunctions as the FTC’s exclusive remedy, thus foreclosing the FTC from seeking restitution. As we have reported previously, the Seventh Circuit’s decision overturned three decades of its own precedent and broke with eight other federal appellate courts.

The FTC has stated that the opinion will not change its enforcement behavior. In a recent panel discussion, FTC Chief Litigation Counsel Bikram Bandy remarked that Credit Bureau Center would not alter the Commission’s approach to deterring fraud by seeking restitution. In ongoing litigation where the FTC is seeking monetary relief from defendants, according to Mr. Bandy, the FTC has prevailed (so far) on all motions raised by opposing counsel that have attempted to assert the legal theories advanced in Credit Bureau Center as a means of blocking a restitution award.

However, Mr. Bandy also noted that the FTC’s desire to remain aggressive would continue in all circuits that have not adopted the Credit Bureau Center holding – which is to say, all circuits other than Seventh. Neora’s decision to file against the FTC in the Northern District of Illinois means that the court will not be able to ignore Credit Bureau Center’s holding relating to Section 13(b).

In a different development that also could have far-reaching implications for the FTC’s ability to obtain civil monetary penalties, the U.S. Supreme Court granted certiorari on November 1 in Liu v. SEC. The Supreme Court will consider whether the SEC may obtain disgorgement under the Securities Act, which only mentions “equitable relief.” The SEC has obtained disgorgement in many instances by asserting that it is a form of equitable relief, but Liu has asserted that disgorgement is a penalty – not an equitable remedy – and therefore is not permitted under a plain reading of the Securities Act. The Court’s interpretation in Liu could prompt courts to reevaluate whether Section 13(b) of the FTC Act allows for restitution.

The FTC’s Campaign Against Multi-Level Marketers

Why was Neora determined to go on the offensive? According to Neora’s complaint, the FTC has been “improperly” reinterpreting the law on pyramid schemes without proper legislation or rulemaking in an attempt to effectively outlaw multi-level marketing (MLMs.) Neora alleges that the FTC assumes that no incentives can be paid for recruitment of participating distributors, even when the MLM makes robust sales to satisfied consumers.

In a statement, Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection, distinguished between legitimate MLMs and pyramid schemes, in alleging that Neora’s business model functions as part of the latter: “Participants in legitimate multi-level marketing companies earn money based on actual sales to real customers, rather than recruitment. But pyramid schemes depend on recruitment of new participants to pay out to existing participants, meaning that the vast majority of participants will ultimately lose money.”

In alleging that Neora directs its distributors to focus on recruiting instead of selling its product, the FTC cited a 2015 promotional video, where one of the company’s top earners remarked that distributors must take three steps to “explode” their business: “Number one. Recruit. Number two: Recruit. Number three: Recruit.” Beyond the recruitment-related allegations, the FTC also contended that Neora and its CEO deceptively promoted certain supplements as a means of curing concussions, chronic traumatic encephalopathy caused by brain trauma and Alzheimer’s disease.

Neora was not the only company targeted in the FTC’s investigation: the Commission also brought lawsuits against Signum Bioscienes and Signum Nutralogix. Unlike Neora, both Signum entities agreed to settle with the FTC. As per the terms of the settlement agreement, both entities will stop making certain claims relating to specific supplements at issue.

On a similar note, last month, the FTC announced it had entered into a $150 million settlement order with AdvoCare International, L.P. and its former chief executive officer. The settlement bans AdvoCare from the multi-level marketing business to resolve the FTC’s charges that the company operated an illegal pyramid scheme that deceived consumers into believing that they could earn considerable income as distributors of health and wellness products. In announcing the settlement, the FTC’s Smith stated: “The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible.”

Firing Back at the FTC

But will the FTC be permitted to continue seeking such restitution awards? In Neora’s complaint against the FTC, the company alleges that the FTC had threatened to sue Neora in the Northern District of Illinois since July 2018 under Section 13(b). Neora claims that the FTC only threatened to sue in the District of New Jersey – where it eventually brought the lawsuit – as a result of the Seventh Circuit’s contrary opinion in Credit Bureau Center.

In a detailed “factual background” section in its complaint, Neora covers the “string of federal court losses” suffered by the FTC relating to the extent of its authority to file lawsuits without first exhausting its own administrative process, regarding its authority to recover monetary relief and relating to its authority to seek injunctive relief. Neora’s complaint predicts that “other Circuit Courts” will follow the Seventh Circuit’s lead in limiting the FTC’s enforcement powers to only restraining orders and injunctions under Section 13(b).

Thus, Neora seeks a declaration from the Northern District of Illinois that Section 13(b) does not authorize the FTC to seek “rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, and other equitable relief” and instead only authorizes the Commission to seek injunctive relief for ongoing conduct.

If Neora succeeds, the FTC’s goal of “getting money back for consumers” would no longer be on the table – at least within courts in the Seventh Circuit. Neora’s hard-hitting approach to challenging the FTC’s claims against it – especially by invoking the ongoing debate over Section 13(b) – certainly bears watching.

Stay tuned for more installments of the “Section 13 (b)log.”

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Nixing the Fix: Recap of FTC Workshop on Product Repair Restrictions https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/nixing-the-fix-recap-of-ftc-workshop-on-product-repair-restrictions https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/nixing-the-fix-recap-of-ftc-workshop-on-product-repair-restrictions Sun, 28 Jul 2019 13:43:01 -0400 Make a product that could break? On July 16, 2019, the FTC hosted a workshop to examine repair restrictions on consumer goods and the “Right to Repair” bills proposed in a number of states. Panelists included representatives from trade associations, the repair and technology industries, and state senators. The Nixing the Fix workshop discussed some of the issues that arise when a manufacturer restricts access or makes it impossible for a consumer or an independent repair shop to make product repairs, and whether such restrictions infringe consumers’ rights.

The discussion during the workshop coalesced around three themes: what is broken, the nature of the repair, and who will conduct the repair. Manufacturer representatives argued that products are getting more sophisticated and therefore more dangerous to fix. They also stated that third party replacement parts and services may be of lower quality and could affect the safety, security, and performance of the product. Manufacturers could face increased liability in connection with the third party parts and services. In addition, requiring reparability of devices could stymie innovative features such as the slim battery.

Consumer advocates urged that manufacturers should sell legitimate parts to repair shops and factor reparability into the design of the product. They asserted that some manufacturing changes (such as gluing in a battery, or epoxying an entire product shut) have limited or no innovative advantages and are done in large part to prevent consumers from fixing their own devices. As a result, consumers are forced to purchase new products.

Panelists proposed a few approaches to address these issues:

  • Require manufacturers to release their product information. Many manufacturers already provide their certified repair shops with information on their products and how to repair and replace defective parts. Consumer and repair shop advocates believe that this information should be shared with everyone.
  • Allow consumers to pay for reparability. One panelist argued for a federally mandated repair score, which would indicate how much of the product is reparable. Consumers could then choose between a repairable and a non-repairable device, and that the products should be priced accordingly.
  • Right to Repair bills. Twenty states have considered right to repair legislation, though some of these bills are no longer active.
In opening and closing remarks, the FTC thanked all in attendance for their participation on this issue and urged all interested stakeholders to submit comments on this issue for agency review. Comments may be filed until September 16, 2019, electronically or in written form. The FTC will consider the comments to inform potential next steps, such as issuing federal guidance on the right to repair standard.

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A Potential New Fight Over FTC's 13(b) Authority https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/a-potential-new-fight-over-ftcs-13b-authority https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/a-potential-new-fight-over-ftcs-13b-authority Sun, 19 May 2019 15:39:06 -0400
On May 17, AdvoCare International LP, marketer of “innovative nutritional, weight-management and sports performance products,” made the extraordinary announcement that it was abandoning its business model. It would no longer engage in multilevel marketing; all sales from here on in would be direct-to-consumer, a single-level marketing compensation plan.

In making this announcement, AdvoCare disclosed that it “has been in confidential talks with the Federal Trade Commission (FTC) about the AdvoCare business model and how AdvoCare compensates its Distributors.” AdvoCare further stated that “[b]ased on more recent discussions, it became clear that this change is the only viable option.”[1] This “change,” effective July 17, will reportedly affect approximately 100,000 distributors.

Wait, what?

Today Law360 published the article “A Potential New Fight Over FTC's 13(b) Authority.” The article provides an analysis of the “existential threat” to the FTC fraud enforcement program.

To read the article, please click here.

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The Battle Over the Scope of FTC Judicial Enforcement Authority: Seventh Circuit Hears Oral Argument Regarding the Reach of Section 13(b) https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/the-battle-over-the-scope-of-ftc-judicial-enforcement-authority-seventh-circuit-hears-oral-argument-regarding-the-reach-of-section-13b https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/the-battle-over-the-scope-of-ftc-judicial-enforcement-authority-seventh-circuit-hears-oral-argument-regarding-the-reach-of-section-13b Thu, 18 Apr 2019 14:15:11 -0400 Last month, we wrote about the decision of the U.S. Court of Appeals for the Third Circuit in FTC v. Shire Viropharma Inc., holding that the FTC may only bring a case under Section 13(b) of the FTC Act when the FTC can articulate specific facts that a defendant “is violating” or “is about to violate” the law. We noted that the same issue in the context of a consumer protection action is likely headed to the U.S. Court of Appeals for the Eleventh Circuit in FTC v. Hornbeam Special Situations LLC.

This issue is also before the Ninth Circuit, where, in a concurring opinion Judge Diarmuid O’Scannlain in FTC v. AMG Capital Management, urged the Circuit to sit en banc to review what he see as wrongly-decided prior decisions that had allowed the FTC to pursue monetary damages in federal court under Section 13(b) of the FTC Act. The “text and structure of the statute unambiguously foreclose such monetary relief,” O’Scannlain wrote.

And now the issue is now teed up Seventh Circuit, which heard argument yesterday on the same issue in FTC v. Credit Bureau Center, LLC, et al., case numbers 18-2847 and 18-3310.

Some background: dating back to the 1980s, the FTC routinely used Section 13(b) as the basis to file lawsuits in federal court to stop allegedly deceptive, unfair, or anti-competitive conduct, and to seek permanent injunctive and monetary relief. Under Section 13(b), the FTC may seek an injunction in federal court “[w]henever the Commission has reason to believe ... that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the [FTC].”

While in cases of pending acquisitions or ongoing fraud it may be clear that the FTC has reason to believe someone “is violating” or “is about to violate” the law, the FTC has also brought cases under Section 13(b) for claims arising from abandoned conduct. Shire, Hornbeam, and now Credit Bureau Center address the FTC’s authority to bring an action in federal court under Section 13(b) in these circumstances. Having lost in the Third Circuit in Shire, the FTC is looking for a different result in the Eleventh and Seventh Circuits, in order to bolster what the FTC views as a critically important aspect.

In Credit Bureau Center, the appellant argued that an Illinois federal court should not have entered a judgment for $5.2 million against a credit-monitoring company because Section 13(b) only permits the FTC to seek injunctive relief over the alleged wrongdoing. In response, the FTC argued that, while Section 13(b) expressly is limited to injunctions, the Seventh Circuit has recognized that "once you have the power to restrain and enjoin, you then have the power to impose other equitable remedies." U.S. Circuit Judge Diane Sykes appeared skeptical, responding that "this whole authority that the FTC has claimed is purely by interpretation through the word 'injunction" and "[t]hat may be how the agency operates, but that's not mentioned anywhere in the statute."

As we await word from the Eleventh, Ninth, and Seventh Circuits, we also are waiting to see whether the FTC will appeal the decision in Shire. Wins in the Eleventh and Seventh Circuits, and a refusal by the Ninth Circuit to take up the issue en banc, would obviously change that calculation, making it more likely that the FTC would seek cert and press its defense in support of the status quo.

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FDA and FTC Issue Joint Warning Letters to Three Online CBD Marketers https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/fda-and-ftc-issue-joint-warning-letters-to-three-online-cbd-marketers https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/fda-and-ftc-issue-joint-warning-letters-to-three-online-cbd-marketers Tue, 02 Apr 2019 14:50:55 -0400 The FDA and FTC jointly issued warning letters to three companies selling CBD products online. The letters allege violations of the Federal Food, Drug, and Cosmetic Act (“FDCA”) and the Federal Trade Commission Act (“FTCA”). Although this is the first time the FDA and FTC have issued joint warning letters relating to CBD, the FDA has been involved in CBD enforcement for the past few years.

Since the passing of the 2018 Farm Bill, which descheduled hemp and hemp derivatives under the federal Controlled Substances Act, the FDA has become the primary federal regulator relative to foods, drugs, cosmetics, and dietary supplements that contain CBD from hemp. The FDA’s most visible enforcement on CBD products to date has been in the form of warning letters issued to online retailers of products labeled as dietary supplements that feature aggressive disease treatment claims. The FDA also tested CBD products in conjunction with warning letters issued in 2015 and 2016 to determine whether they contained the CBD levels listed on the labels.

In the letters from last week, the FDA turned its focus onto various CBD products marketed online as “drugs,” including “CBD Salve,” “CBD Oil,” “CBD for Dogs,” “Hemp Oil,” “CBD Softgels,” “Liquid Gold Gummies (Sweet Mix),” “Liquid Gold Gummies (Sour Mix),” and “blue CBD Crystals Isolate 1500mg.” The FDA determined that the companies’ websites contained claims about their CBD products that established them as unapproved “drugs” under section 201(g)(1) of the FDCA. The letters also referenced the FTC’s substantiation standard, stating the FTC had concerns that certain efficacy claims that were made may not be substantiated by competent and reliable scientific evidence. They also warned that violations of the FTCA may result in legal action seeking a Federal District Court injunction or Administrative Cease and Desist Order, possibly including a requirement to pay back money to consumers.

As noted above, these letters are unique, as it is the first time the FDA has issued a joint FDA/FTC warning letter relating to CBD. This is also the first time the FDA has referenced the FTC’s substantiation standard or threaten any specific penalty for violations of the FTCA. For companies marketing CBD, it is important to keep in mind that although the market has flourished despite a host of regulatory uncertainties, it is the regulators’ opinion that the rules regarding advertising and health claims are clear. Competent and reliable scientific evidence remains the standard.

Over the last few years, however, the FTC’s health claim enforcement has featured several false cure-type products. Cases against Regenerative Medical Group, Cellmark, iV Bars, and Nobetes challenged unproven representations for products promising to treat Parkinson’s disease, macular degeneration, cancer, multiple sclerosis, and diabetes. Although we have yet to see the FTC announce any settlements relating to CBD products, these letters signal that FDA is not alone in its concern over aggressive CBD treatment claims.

The warning letters can be found here:

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FTC to Use 6(b) Authority to Examine Tech Companies’ Data Practices https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ftc-to-use-6b-authority-to-examine-tech-companies-data-practices https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ftc-to-use-6b-authority-to-examine-tech-companies-data-practices Fri, 22 Mar 2019 14:12:19 -0400 FTC Chairman Joe Simons recently acknowledged the Commission’s plan to use its authority under Section 6(b) of the FTC Act to examine the data practices of large technology companies. In written responses to questions from members of the U.S. Senate Commerce Committee following in-person testimony in November 2018, Chairman Simons confirmed that plans were underway to gather information from tech companies, though the specific targets or areas of focus remained under consideration.

As described by the FTC, Section 6(b) of the FTC Act “plays a critical role in protecting consumers,” and broadly authorizes the Commission to obtain information – or “special reports” – about certain aspects of a company’s business or industry sector. Companies that are the focus of an FTC study pursuant to Section 6(b) must respond to a formal order issued by the Commission that, similar to a civil investigative demand, can include a series of information and document requests. The information obtained through the order may then be the basis for FTC studies and subsequent industry guidance or rulemaking.

The revelation of the pending 6(b) orders comes amid concerns from federal and state lawmakers and regulators about transparency relating to “Big Data” practices and online data collection, and the use of artificial intelligence and machine-learning algorithms in decision-making. In remarks this week to attendees of an Association of National Advertisers conference, Chairman Simons noted a potential lack of transparency in the online behavioral advertising context and “the fact that many of the companies at the heart of this ecosystem operate behind the scenes and without much consumer awareness.”

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Time Runs Out for TikTok App: Developer Musical.ly Agrees to FTC’s Largest-Ever Fine for Children’s Privacy Violations https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/time-runs-out-for-tiktok-app-developer-musical-ly-agrees-to-ftcs-largest-ever-fine-for-childrens-privacy-violations https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/time-runs-out-for-tiktok-app-developer-musical-ly-agrees-to-ftcs-largest-ever-fine-for-childrens-privacy-violations Fri, 08 Mar 2019 11:11:35 -0500 The FTC recently announced a $5.7 million settlement with app developer Musical.ly for COPPA violations associated with its app (now known as TikTok)—the agency’s largest-ever COPPA fine since the enactment of the statute. The agency charged the app company, which allows users to create and share videos of themselves lip-syncing to music, with unlawfully collecting personal information from children.

To create a TikTok profile, users must provide contact information, a short bio, and a profile picture. According to the FTC, between December 2015 and October 2016, the company also collected geolocation information from app users. In 2017, the app started requiring users to provide their age, although it did not require current users to update their accounts with their age. By default, accounts were “public,” allowing users to see each other’s bios (which included their grade or age). It also allowed users to see a list of other users within a 50-mile radius, and gave users the ability to direct message other users. Many of the songs available on the app were popular with children under 13.

The FTC further alleged that Musical.ly received thousands of complaints from parents asserting that their child had created the app account without their knowledge (and noted an example of a two-week period where the company received more than 300 such complaints). The agency also noted that while the company closed the children’s accounts in response, it did not delete the users’ videos or profile information from its servers.

The FTC’s Complaint focused on practices spanning from 2014 through 2017. Musical.ly was acquired by ByteDance Ltd. in December 2017, and merged with the TikTok app in August 2018.

COPPA identifies specific requirements for operators who collect personal information from children under 13, including obtaining consent from parents prior to collection and providing information about collection practices for children’s data. Online services subject to the rule generally fall into two categories: (1) sites that are directed to children and collect personal information from them; and (2) general audience sites that have actual knowledge that they are collecting personal information from children. Civil penalties for violations of COPPA can be up to $41,484 per violation.

According to the FTC, Musical.ly’s app fell into both categories:

  1. The company included music and other content appealing to children on the app. For example, many of the songs included on the app were popular with children under 13, and the app used “colorful and bright emoji characters” that could appeal to children.
  2. Once the company began collecting the ages of its users, Musical.ly had actual knowledge that some of its users were under the age of 13. In spite of this, the company did not obtain consent from the parents of users under the age of 13, or comply with other COPPA requirements.
FTC Commissioners Chopra and Slaughter issued a joint statement on the settlement, pointing out that FTC staff had uncovered disturbing practices of a company willing to pursue growth at the expense of endangering children. They also noted that previously, FTC investigations typically focused on individual accountability in limited circumstances, rather than pursuing broader enforcement against company leaders for widespread company practices. The Commissioners further indicated that as the FTC continues to pursue legal violations going forward, it is time to “prioritize uncovering the role of corporate officers and directors” and to “hold accountable everyone who broke the law.”

This settlement indicates that the FTC continues to prioritize privacy enforcement—particularly where vulnerable audiences, such as children, are involved. Future FTC enforcement actions could signal an expanded approach to individual liability, including with respect to larger companies.

The case is also a good reminder of the value in performing robust privacy due diligence when considering acquiring an entity, and meaningfully assessing the risk of a company’s data practices before adding them to the portfolio. A widely popular business with significant data assets may not look as attractive once civil penalties and injunctive terms are added to the mix.

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FTC Opts Out of Updating Anti-Spam Rule https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ftc-opts-out-of-updating-anti-spam-rule https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ftc-opts-out-of-updating-anti-spam-rule Fri, 15 Feb 2019 02:28:38 -0500 The Federal Trade Commission (FTC) announced this week that it would not update its anti-spam rule, completing the agency’s first 10-year review of the regulation.

The FTC last updated the rule, known as the CAN-SPAM Rule, in 2008. The rule requires, among other things, that commercial e-mail messages have a mechanism for allowing the recipient to opt out of future messages.

As part of the FTC’s review process, the FTC sought comments on whether the agency should update the definition of “transaction or relationship messages,” shorten the time period for honoring opt-out requests, or add to the statutory list of aggravated violations.

Ultimately, the Commission chose to keep the 2008 rule. Despite the advent of social media, increasingly sophisticated processes for identifying spam and managing opt-outs, and never-ending threats to a clean inbox, the FTC repeatedly declined to take up commenters’ suggestions for changing the CAN-SPAM Rule, citing unclear cost-benefit analysis outcomes, lack of evidence, and limited Congressional authority. Here’s some examples:

  • On shortening the time period for opt-out requests: “[N]one of these comments provided the Commission with evidence showing how or to what extent the current ten business-day time-period has negatively affected consumers, nor did they address the concerns noted by other commenters that such a change may pose substantial burdens on small businesses.”
  • On commenter suggestions to modify opt-out requirements: “[N]one of the comments provides the Commission with information about the costs and benefits of these proposed rule changes.”
  • On comments asking the FTC to require consumer permission before transferring or selling a consumer’s email address to a third-party, and blocking all unsolicited spam from servers outside the US: “The Commission also declines to consider the remaining proposed modifications because each would be inconsistent with the Commission’s circumscribed authority under the Act.”
The FTC voted unanimously to confirm the CAN-SPAM Rule. If you have any questions about your obligations pursuant to the CAN-SPAM Rule, please contact Alysa Hutnik or Alex Schneider at Kelley Drye.

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Avoid a Misstep with Qualified “Made in USA” Claims: Class Action Against New Balance Leads to Proposed $750,000 Settlement https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/avoid-a-misstep-with-qualified-made-in-usa-claims-class-action-against-new-balance-leads-to-proposed-750000-settlement https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/avoid-a-misstep-with-qualified-made-in-usa-claims-class-action-against-new-balance-leads-to-proposed-750000-settlement Tue, 12 Feb 2019 11:10:57 -0500 Most of our posts regarding “Made in USA” claims relate to FTC investigations and enforcement actions. Private plaintiffs, however, also closely watch those claims. For example, in 2018 plaintiffs filed a class action lawsuit against New Balance Athletics Inc. challenging qualified “Made in USA” claims. Although the plaintiffs acknowledged that New Balance qualified the claim in some places to indicate that the domestic value is at least 70%, they alleged that the general impression is that the products are American made. To resolve that litigation, a California federal judge recently granted preliminary approval to a proposed $750,000 settlement.

In Dashnaw v. New Balance Athletics, Inc., consumers alleged that New Balance mischaracterized its line of “Made in USA” sneakers because as little as 70% of the product was made with domestic components or labor. The claim appeared in advertising, on the shoes, and on the shoe boxes. The complaint acknowledged that New Balance disclosed in some places that its “Made in USA” sneakers contain a domestic value of 70% or greater, but alleged that an “Made in USA” claim appeared in places like the shoe and the shoe box. Because 30% of the value of those shoes could be attributed to a foreign country, plaintiffs alleged that the claims violated both California law, requiring that foreign materials must not exceed 5% of the final wholesale value, and FTC guidelines, stating that a product must be “all or virtually all” made in the United States.

The case was transferred from state court to the U.S. District Court for the Southern District of California, where the parties initiated settlement discussions. In April, the parties proposed a settlement of $750,000, with $215,000 going to settlement administration costs and compensation and $535,000 to consumers, with each consumer receiving up to $10. Judge Lorenz denied the settlement stating that the proposed amount was not enough for the estimated 1 million class action members. In response, the parties explained that a 5% participation rate among class members would result in full compensation and even with a 10-15% participation rate, each class member would receive 35-50% of the maximum damages the class could receive at trial, which they called a “reasonable settlement amount.” Judge Lorenz granted preliminary approval to the proposed settlement of $750,000 on January 25, 2019.

This case reminds advertisers that when using a disclosure to qualify a Made in USA claim or any other claim, the disclosure must appear consistently to maximize effectiveness. The FTC has also cautioned that even qualified claims may imply more domestic content than exists, so advertisers should avoid qualified claims unless the product has a significant amount of U.S. content or U.S. processing.

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NAD Referrals To FTC: How Big Is That Stick? https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/nad-referrals-to-ftc-how-big-is-that-stick https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/nad-referrals-to-ftc-how-big-is-that-stick Wed, 09 Jan 2019 00:57:41 -0500 The Federal Trade Commission has long supported advertising industry self-regulation as a means of promoting truthfulness and accuracy in advertising. One of the key aspects of this success has been threat of referral to the FTC: Advertisers that refuse to participate in the self-regulatory process or refuse to comply with recommendations after participating are referred to the appropriate government entity, usually the FTC’s Division of Advertising Practices, which will review the claims at issue. Over the years, the specter of a National Advertising Division referral to the FTC has prompted most advertisers to participate in the self-regulatory process and comply with the final decision.

Law360 published the article “NAD Referrals To FTC: How Big Is That Stick?,” co-authored by partner John Villafranco and senior associate Donnelly McDowell. The article provides an analysis of recent NAD cases that suggests referrals to the FTC are on the rise over the past two years and discusses advertiser commitment to the self-regulatory process. Are advertisers turning their back on self-regulation and rolling the dice at the FTC? And are they doing so based on an assessment of the risk that a referral could result in a major FTC investigation or enforcement action?

To read the article, please click here.

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How the Government Shutdown Is Affecting Federal Agencies https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/how-the-government-shutdown-is-affecting-federal-agencies https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/how-the-government-shutdown-is-affecting-federal-agencies Wed, 02 Jan 2019 17:11:01 -0500 While many today returned to work after the Holiday season, things remained quieter than usual here in the nation’s capital – with many federal workers furloughed until further notice as the federal government continues to be in a partial shutdown. President Trump is reportedly meeting with congressional leaders today ahead of Thursday’s start to a new congressional session but, at least for now, there’s no immediate end to the shutdown in sight.

Here’s how the shutdown is affecting federal agencies responsible for overseeing and enforcing advertising and privacy laws:

  • The FTC closed as of midnight December 28, 2018. All events are postponed and website information and social media will not be updated until further notice. While some FTC online services are available, others are not. More information here.
  • The CPSC is also closed, although a December 18, 2018 CPSC memorandum summarizing shutdown procedures indicates that certain employees “necessary to protect against imminent threats to human safety” will be excepted employees and continue work during the shutdown. The CPSC consumer hotline also continues to operate. Companies should remember that obligations to report potential safety hazards are not furloughed, so the mantra of “when in doubt, report” still applies, even if public announcement of a recall may be delayed.
  • Roughly 40% of FDA is furloughed according to numbers released by its parent agency, the Department of Health and Human Services. In a post on its website, the agency explained that it will be continuing vital activities, to the extent permitted by law, including monitoring for and responding to public health issues related to the food and medical product supply. The agency is also continuing work on activities funded by carryover user fee balances, although it is unable to accept any regulatory submissions for FY 2019 that require a fee payment.
  • Because the CFPB is funded through the Federal Reserve and not Congress, it remains in operation.

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Andrew Smith Named Director of FTC’s Bureau of Consumer Protection https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/andrew-smith-named-director-of-ftcs-bureau-of-consumer-protection https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/andrew-smith-named-director-of-ftcs-bureau-of-consumer-protection Wed, 16 May 2018 21:11:12 -0400 Andrew Smith was recently named Director of the FTC’s Bureau of Consumer Protection. With a strong background in financial matters, businesses can expect Smith to focus on issues affecting consumer financial services.

Smith is not a stranger to federal positions. Although most recently a Partner in the Regulatory and Public Policy Group at Covington & Burling LLP and Co-Chair of the firm’s Financial Services Group, Smith previously held roles as Senior Counsel and Acting Assistant General Counsel at the SEC from 1997 to 2000 and as the Assistant to the Director of the Bureau of Consumer Protection from 2001 to 2005. During Smith’s time at the FTC, he focused largely on consumer financial protection policy—mainly through enforcement and rulemaking. For example, while serving as the program manager for the Fair and Accurate Credit Transactions Act of 2003, Smith helped to draft ten rules and six studies.

Smith’s interest in financial services has followed him throughout his career. His practice at Covington focused specifically on financial privacy—including regulatory compliance, consumer financial services laws, and enforcement actions and investigations. He also serves as the Chair of the ABA’s Consumer Financial Services Committee.

Notably, in January of this year, Smith testified before the House of Representatives Subcommittee on Financial Institutions and Consumer Credit about fintech policy. His statements suggest that he is in favor of an increased role of fintech in the banking industry, although he proposes passing legislation that clarifies the role of banks as lenders, regardless of the vendor or service provider. Further indications of Smith’s interest in the fintech space come from an editorial he authored in The Hill in February of this year. He advocates collaboration between fintech and banks to offer the middle class more financial options, e.g., point-of-sale lending. In Smith’s words, “the future of banking is the internet, and brick-and-mortar is the past.” His piece supports the Modernizing Borrower Credit Opportunities Act of 2017, a bipartisan bill to regulate the fintech industry introduced in November of 2017.

Another indication of Smith’s likely priorities as Bureau Director may be the people he worked with during his prior stint at the FTC. For example, he worked closely with Howard Beales who served as the Director of the Bureau of Consumer Protection from 2001 to 2004. Regarding advertising specifically, Beales advocates for a flexible “reasonable basis” standard for substantiation requirements, as opposed to more stringent evidentiary standards. This position favors the view that consumers benefit from having access to information. Having served with Beales, Smith may take a similar approach to substantiation requirements as Director.

Despite Smith’s previous experience, however, his appointment has not been without controversy. While at Covington, Smith represented Facebook, Uber, and Equifax in both investigations and FTC settlements regarding data breaches. Although Smith plans to recuse himself from these high profile cases in his new role, opponents have noted that Smith’s representation of these companies may put him at odds with the FTC’s consumer protection mission. Senator Richard Blumenthal stated that he could “imagine worse choices [for Bureau Director], but not many,” noting that Smith was “on the wrong side of [the] issues” in his testimony on behalf of Equifax last fall. During that testimony, Smith indicated that credit bureaus should not have a fiduciary duty to consumers from whom they collect data, and that current industry regulations were satisfactory to protect consumers. Senator Elizabeth Warren called Smith’s appointment “corruption, plain and simple,” referring to him as “Equifax’s hired gun.” Further, David Vladeck, who was Bureau Director from 2009 to 2012, noted that Smith’s recusing himself from some of the agency’s most important cases is an unusual position for someone in his role and wondered “how far-reaching the recusals will be.”

The FTC’s newly-appointed Democratic Commissioners had similar concerns, turning a usually perfunctory vote into a point of contention. Rebecca Slaughter noted that appointing a Director “who is barred from leading on data privacy and security matters that affect so many consumers, command so much public attention, and implicate such key areas of the law potentially undermines the public’s confidence in the commission’s ability to fulfill its mission.” Rohit Chopra, a fellow Democrat, agreed, noting that Smith’s conflicts “[raise] many questions,” and would put Smith “on the sidelines” in some of the agency’s most important cases. He also noted that FTC Chairman Joe Simons made the pick without a Commission meeting. Simons, however, called the appointment a “source of unnecessary controversy,” indicating that “it is impossible to attract high caliber professionals to the FTC without encountering some conflicts,” and noting that the agency can readily handle recusals.

Although we may have some insight into Smith’s new role as Director, his position on consumer protection issues outside of the financial industry, and the effects of his recusals, are left to be seen. We can expect, however, that helping to regulate fintech, and other financial security issues, will likely be high on his list of things to do.

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Support for FTC Jurisdiction Over Broadband: Ninth Circuit En Banc Rules Common Carrier Exemption is “Activity,” and not “Status-based,” Reversing Earlier AT&T Victory https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/support-for-ftc-jurisdiction-over-broadband-ninth-circuit-en-banc-rules-common-carrier-exemption-is-activity-and-not-status-based-reversing-earlier-att-vi https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/support-for-ftc-jurisdiction-over-broadband-ninth-circuit-en-banc-rules-common-carrier-exemption-is-activity-and-not-status-based-reversing-earlier-att-vi Wed, 28 Feb 2018 16:26:58 -0500 The Republican-led FCC’s effort to get out of the business of regulating broadband providers’ consumer practices took a step forward on Monday. In an appeal that has been proceeding in parallel with the FCC’s “Restoring Internet Freedom” reclassification proceeding, the U.S. Court of Appeals for the Ninth Circuit issued an opinion giving the Federal Trade Commission (FTC) broad authority over practices not classified by the FCC as telecommunications services. Specifically, the Ninth Circuit, sitting en banc, issued its long-awaited opinion in Federal Trade Commission v. AT&T Mobility, holding that the “common carrier exemption” in Section 5 of the FTC Act is “activity based,” exempting only common carrier activities of common carriers (i.e., the offering of telecommunications services), and not all activities of companies that provide common carrier services (i.e., rejecting a “status-based” exemption). The case will now be remanded to the district court that originally heard the case. Coupled with the FCC’s reclassification of Broadband Internet Access Services (BIAS) in the net neutrality/restoring internet freedom proceeding, the opinion repositions the FTC as top cop on the Open Internet and broadband privacy beats.

Background

As we discussed in several earlier blog posts, this case stems from a complaint that the FTC filed against AT&T Mobility in the Northern District of California in October 2014 alleging that AT&T deceived customers by throttling their unlimited data plans without adequate disclosures. AT&T moved to dismiss the case on the grounds that it was exempt under Section 5, based on its status as a common carrier, but the district court denied the motion, finding that the common carrier exemption was activity-based, and AT&T was not acting as a common carrier when it offered mobile broadband service, which, at the time the FCC classified as a non-common-carrier “information service.” AT&T appealed and a three-judge panel of the Ninth Circuit reversed the district court, holding that the common carrier exemption was “status-based,” and the FTC lacked jurisdiction to bring the claim. As we noted then, the three-judge panel’s decision was the first recent case to address the “status-based” interpretation of the common carrier exemption, and the decision – if it stood – could re-shape the jurisdictional boundaries between the FCC’s and the FTC’s regulation of entities in the communications industry.

The En Banc Court’s Analysis

The FTC appealed the case to an en banc panel of the Ninth Circuit, which issued its opinion this week. The court’s decision relied on the text and history of the statute, case law, and significant deference to the interpretations of the FTC and FCC, which both view the common carrier exemption as activity-based rather than status-based.

The Court first analyzed the history of Section 5 and the common carrier exemption. It found that the Congress intended the exemption to be activity based and rejected textual arguments advanced by AT&T that other statutory provisions—including Section 6 of the FTC Act and the Packers and Stockyard Exception—demonstrated that the common carrier exemption was status based. The Court gave significant weight to the understanding of common carriers in 1914, when the FTC Act was first passed, and legislative statements made during consideration of that Act.

The Court then addressed case law that an entity can be a common carrier for some activities but not for others. The Court found this case law to support an activity-based interpretation of the common carrier exemption. Specifically, the Court found that while Congress has not defined the term “common carrier,” Supreme Court case law leading up to and following the passage of the FTC Act interpreted the term “common carrier” as an activity-based classification, and not as a “unitary status for regulatory purposes.” The Court found that its approach was consistent with the Ninth Circuit’s longstanding interpretation of the term “common carrier” as activity-based, as well as the interpretations of the Second, Eleventh, and D.C. Circuits. (AT&T did not contest these cases, but instead argued that the FCC had many legal tools to address non-common carrier activities, including Title I ancillary authority and potential structural separation.)

Notably, the Court also provided significant deference to the views of the FTC and FCC, both of which have recently expressed the view that the FTC could regulate non-common carrier activities of common carriers. The Court cited the FCC’s amicus brief before the en banc panel and a 2015 Memorandum of Understanding between the two agencies that interpreted the common carrier exemption as activity-based.

Finally, the Court rejected arguments that the FCC’s 2015 Open Internet Order reclassifying mobile broadband as a common carrier service (or the FCC’s 2017 Restoring Internet Freedom Order reversing that classification) retroactively impacted the outcome of the appeal.

Agency Response

After the court issued its opinion, both FTC Acting Chairman Maureen Ohlhausen and FCC Chairman Ajit Pai applauded the ruling. Chairman Ohlhausen stated that the ruling “ensures that the FTC can and will continue to play its vital role in safeguarding consumer interests including privacy protection, as well as stopping anticompetitive market behavior,” while Chairman Pai stated that the ruling is “a significant win for American consumers” that “reaffirms that the [FTC] will once again be able to police Internet service providers” after the Restoring Internet Freedom Order goes into effect.

Our Take

The Ninth Circuit’s ruling is unsurprising in some senses. When a court grants en banc review, it often is for the purpose of reversing or at least narrowing the panel’s initial decision. AT&T also faced fairly strong questioning during the oral argument in September. Further, the Court’s decision affirms a position that the FTC had taken for many years and that the FCC – as evidenced by the 2015 Memorandum of Understanding – supported. Thus, the en banc court here effectively affirms current practice.

All of that said, the issue is not settled. AT&T’s reaction was decidedly muted, and it may still seek Supreme Court review of the question. This option may be particularly attractive to AT&T because it noted several times during the oral argument that it faced both FTC and FCC enforcement actions against it for allegedly the same activities. The Ninth Circuit did not mention the FCC enforcement action or the potentially conflicting interpretations of AT&T’s obligations. It is not clear whether both actions could or would proceed as a result of the decision.

Going forward, once the FCC’s Restoring Internet Freedom Order takes effect, we can expect that the FTC will serve as the top cop for alleged broadband consumer protection violations, including with respect to open Internet- and privacy-related complaints. And yet, there is still some uncertainty. The FCC’s Restoring Internet Freedom Order is under appeal. If the appeals court that ultimately hears the challenges to the Restoring Internet Freedom Order were to reverse the Order, the possibility exists that broadband services would again come under FCC common carrier jurisdiction, thereby exempting the provision of such services from FTC jurisdiction even under an activity-based interpretation of the FTC Act. Thus, we may not have finality on broadband regulation, despite the Court’s decision this week.

More broadly, we expect that the FTC will continue to push for eliminating the common carrier exemption altogether before the Congress, as it has for many years. Congressional action to repeal the exemption appears unlikely in the near term.

At least for now, broadband providers should continue to ensure that their privacy and broadband practices are in line with FTC guidelines and judicial interpretations of Section 5, and should comply with remaining FCC Open Internet requirements, such as the transparency rule.

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2017 Recap https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/2017-recap https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/2017-recap Fri, 05 Jan 2018 16:27:12 -0500 Most Popular Ad Law Access Posts of 2017

As reported in our Ad Law News and Views newsletter, Kelley Drye’s Advertising Law practice posted 106 updates on consumer protection trends, issues, and developments to this blog in 2017. Here are some of the most popular:

Ad Law News and Views is produced every two weeks to help you stay current on advertising law and privacy matters. You can subscribe to it and other Kelley Drye Publications here and the Ad Law Access blog by email or RSS feed.

2018 Advertising and Privacy Law Webinar Series

Please join Kelley Drye in 2018 as we continue our well attended Advertising and Privacy Law Webinar Series. Like our in-person events, this series gives key updates and provides practical tips to address issues faced by counsel as well as CLE credit. This webinar series will start again in February 2018. Please revisit the 2017 webinars here.

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