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Stay ADvised: What's New This Week, September 30

By Marc Roth, Nancy J. Felsten, and Robert J. Driscoll
10.01.19
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FTC Conducts Workshop on "Made in USA Claims" and Announces Rulemaking for Negative Option Marketing

In addition to managing a full plate of enforcement actions, many of which have been reported on these pages, the Federal Trade Commission (FTC) has also been busy on other fronts. Last week the agency conducted a workshop on consumer perceptions on, and the sufficiency of, current guidance for making “Made in USA” marketing claims and announced a proposed rulemaking process for negative option marketing. The following is a brief summary of these developments.

Made in the USA

On September 26th the FTC conducted a public workshop addressing the issue of “Made in the USA” marketing claims, which featured four panels comprised of individual companies, industry trade groups, and consumer advocates, moderated by FTC staff attorneys. The purpose of the workshop was to explore whether, and how much, consumers care about products bearing this designation and whether companies have clear guidance on FTC expectations for satisfying this claim. With regard to consumers, virtually all panelists agreed that consumers do care and are willing to pay more for products bearing this designation; and industry representatives felt that having this status provided a competitive advantage.

When asked by FTC staff why consumers care about the designation, various participants reported that formal and informal surveys revealed a common patriotic theme – investing in U.S. companies, helping the local economy, promoting jobs, and supporting communities. No panelist reported that consumers view the designation as conveying the superiority of these products over products without it.

With respect to the sufficiency of regulatory guidance for companies wishing to use this designation, many of the industry participants expressed frustration with the FTC’s current standard (from 1997) that “all or virtually all” of a product be made in the USA. Here, they claimed that too much emphasis is placed on the origin and percentage of a product’s components when the FTC should be more concerned with where the product is manufactured. To that point, they emphasized that more attention should be focused on the “Made” part of the claim, taking into consideration where the product is created or transformed from raw materials. 

Last, when asked about the effectiveness of enforcement, panelists (expectedly) disagreed along party lines. Consumer advocates felt that since current enforcement actions are based solely on deception under Section 5 of the FTC Act, which does not provide for civil penalties, there is little to no disincentive to comply. Industry representatives, on the other hand, felt that since no actual consumer harm results from an improperly labeled product, financial penalties are not warranted. That said, all participants agreed that non-compliance hurts consumers and manufacturers alike; violators unfairly benefit from an enforcement mechanism that lacks real teeth.

The FTC will accept public comments, including further evidence of consumer perceptions, on these issues until October 11. Comments may be sent or hand delivered to the FTC in Washington, D.C., with electronic comments filed here.

Negative Option Rulemaking

On September 24th the FTC announced that it had published in the Federal Register an Advance Notice of Proposed Rulemaking (ANPR) seeking public “comments on ways to improve its existing regulations for negative option marketing.” The FTC defines negative option marketing as “a common form of marketing where the absence of affirmative consumer action constitutes assent to be charged for goods or services.” Noting that consumers may benefit from such offers as they provide a method for consumers to receive products and services seamlessly and without interruption until cancelled, the agency has also observed consumer abuse where “marketers fail to make adequate disclosures, bill consumers without their consent, or make cancellation difficult or impossible.”

The agency noted that it has brought dozens of cases against companies that have improperly marketed and conducted these types of programs under myriad of laws and regulations specific to this area, such as the Telemarketing Sales Rule and the Restore Online Shopper’s Confidence Act, as well as its general authority under Section 5 of the FTC Act. It also enforces a trade regulation rule titled the “Rule Regarding Use of Negative Option Plans by Sellers in Commerce,” which is better known as the “prenotification negative option rule” since it applies to book and record clubs that were popular decades ago, but today are rarely used.

The FTC has observed that there are gaps in these laws, leaving industry and consumers with an inconsistent “legal framework across different media and types of plans.” As such, the FTC notes, “current regulations may lack the specificity necessary to deter deceptive practices.”

To address these issues, the FTC is seeking public comment on “whether it should use its rulemaking authority under the FTC Act to expand the scope and coverage of the existing Negative Option Rule,” and “suggestions or alternative methods for improving current requirements, in an effort to more effectively protect consumers from negative option violations.”

The FTC will accept public comments on the ANPR until 60 days following its posting in the Federal Register. Comments may be sent or hand delivered to the FTC in Washington, D.C., with electronic comments filed here using referencing “Project No. P064202.”

Operators of (Yet Another) Deceptive "Free Trial" Scheme Settle with FTC

Internet marketers that used "free trial" offers to sell dietary supplements and personal care products recently settled a Federal Trade Commission (FTC) complaint that accused the group of running a scheme that defrauded consumers out of millions of dollars. The complaint alleged the defendants fleeced customers via false promises of free product trials, which turned into hundreds of dollars in unauthorized charges per customer.

The orders together impose financial judgments against the defendants in excess of $100 million. However, due to the defendants’ inability to pay this amount, the financial judgments will be suspended after the defendants surrender to the FTC cash and various assets worth over $3 million value.

The FTC’s original 2018 complaint (which was amended in May 2019 to add additional defendants) alleged that going back to 2014, defendants Apex Capital Group, company principals Phillip Peikos and David Barnett, and other related corporate entities solicited customers through the pretext of free trials for dietary supplements and personal care products. Defendants allegedly advertised the trials for just $4.95 to cover the cost of shipping and handling, but tacked on myriad other charges that ended up costing consumers a great deal more.

Worse, shortly after ordering the "free trial," consumers were charged the full price of the product and, without their consent, were signed up for “continuity programs” that committed them to paying $90 a month for the product subscriptions, which went on indefinitely until affirmatively cancelled.

Moreover, the FTC alleged that Apex Capital and the web of related entities that helped run the scheme also charged consumers for allegedly complementary products. By the time all was said and done, these free trials were anything but.

To evade detection of the scheme, the FTC alleged, the defendants also set up and processed credit card payments through third-party shell companies established the U.S. and the U.K., a practice the FTC alleged amounted to illegal money laundering.

The FTC alleged that in addition to attempting to deflect inevitable chargeback requests from consumers looking to dispute the unauthorized charges, the defendants manipulated the chargeback requests by spreading them out across multiple merchant accounts, a practice called "load balancing." Furthermore, the defendants ran low-dollar value sales, called "microtransactions" through the various merchant accounts rather than the actual amounts charged to consumers.

However, these attempts to evade detection went only so far, and the FTC filed its complaint against Apex Capital in 2018. The recently announced stipulated orders settle the matter against all but two defendants who were added to the complaint earlier this year—a Latvian payment processing company and the company’s CEO.

In addition to the financial penalties imposed on defendants, the orders bar Apex Capital from running negative option plans to sell beauty products, supplements, food or drugs. If the defendants run negative option subscriptions selling other types of products, the orders explicitly obligate them to obtain express consent from consumers for any charges, to make enhanced disclosures and to more closely supervise their affiliate marketers.

Key Takeaways

With this case, the FTC continues its hot pursuit of deceptive "free trial" schemes, many of which follow precisely the same pattern: charging consumers a low trial fee or shipping and handling charge, and then disclosing in fine print or behind links to other webpages any additional charges associated with the trial and that the program will continue unless cancelled.

Notwithstanding this and other deceptive free trial schemes that we have recently reported on, free trial offers can, in fact, be provided in a legally compliant manner. Putting aside the egregious efforts these defendants employed to evade detection of their charges, legitimate sellers may conduct free trial offers that convert to paid continuity programs by clearly and conspicuously disclosing to consumers all of the material terms of the offer and obtaining consumers’ informed, affirmative consent to enroll.

The terms should disclose the true of cost of the trial such as any shipping and handling fees, that the program will automatically continue unless cancelled, the date and means by which to cancel, the length of renewal terms or product delivery frequency, and, if known, the amount of future charges. Once enrolled, consumers should be provided with an easy way to cancel.

Seller of Purported Organic Beauty Products Deceived Consumers, Settles with FTC

Truly Organic? More like hardly organic, said the Federal Trade Commission (FTC), which recently settled a lawsuit it filed against beauty retailer Truly Organic alleging that the company sold products it knew were not organic while deliberately positioning itself in the market as an organic company.

In the settlement, Truly Organic and its CEO Maxx Harley Appelman agreed to pay $1.76 million to resolve claims his compmay deceptively marketed their products as organic and vegan. The FTC complaint alleged violations of the FTC Act based on these misrepresentations, which apparently began as soon as the company started doing business in 2014.

Based in Miami Beach, Truly Organic sells bath and beauty items such as haircare products, personal lubricants, body wash products, lotions, baby products, bath bombs, and more. The company manufactures some of its products by combining pre-manufactured wholesale bath and beauty products with a few new ingredients to make them more visually appealing.

In the case of its bath bombs and soaps, Truly Organic resells the products in rebranded packaging at a markup. Notably, most of the ingredients the company buys, repackages, and resells are not organic, according to the FTC.

Nevertheless, the company marketed the products as organic while it knew there was little, if nothing, organic about them, says the FTC. Importantly, the products were not certified organic in accordance with USDA standards.

To what extent were the "organic" marketing claims deceptive? In some cases the products included chemical ingredients like cocamindopropyl betaine and sodium cocosurfactant, substances that are not permitted in organic products. Even when organic ingredients were available, Truly Organic made its products with conventional ones, such as conventionally grown lemon juice.

In fact, according to the FTC, even after Truly Organic was the subject of a 2016 USDA investigation into its organic labels, the company continued to provide social media marketers with product labels displaying the false organic certification.

As a result, the FTC alleged, consumers looking at the company’s marketing materials were led to believe Truly Organic products were indeed truly organic. In addition to its advertising and social media efforts, the products were labeled as containing "100% Organic Ingredients," being "certified organic," "USDA organic," and "100% organic ingredients." 

Adding insult to injury, the company marketed products containing non-vegan lactose and honey as vegan.

In addition to the monetary penalty, the court order prohibits Truly Organic from making any deceptive claim about a good or service being organic or vegan or using organic ingredients. Notably, the order also bars the company and Appelman from making any representations about the “environmental or health benefits” of a product unless they are true, not misleading, and supported by scientific evidence.

In a statement, Director of the FTC’s Bureau of Consumer Protection Andrew Smith put Truly Organic’s wrongdoing into context: "To know if a product is truly organic, consumers have to rely on companies to be truthful and accurate. That’s why we’ll hold companies accountable when they lie about their products being organic, especially when they’ve used fake certificates and ignored USDA warnings."

Key Takeaways

This case is a reminder to companies of the dangers of marketing “organic” products that are organic in name only. The FTC will pursue companies attempting to take advantage of consumers’ desire for natural and organic products by marketing counterfeit goods that have nothing organic about them but the name.

In a separate statement, Commissioner Rohit Chopra used the case as an opportunity to urge the FTC to codify what he said was the more appropriate strict approach to enforcement of fraud adopted by the agency in this matter.

Ninth Circuit Affirms Denial of Samsung Bid to Arbitrate Two Separate Suits Based on "In-the-Box" Provisions

Affirming two lower court decisions, the United States Court of Appeals for the Ninth Circuit recently handed down a pair almost identical rulings finding that Samsung may not require arbitration of two separate disputes over its Samsung Galaxy S7 phones. In its rulings, the court determined that consumers who purchased the phones did not have adequate notice of the arbitration provisions contained in Samsung’s standard terms and conditions.

The rulings stem from two unrelated lawsuits, a personal injury lawsuit and a proposed class action lawsuit alleging Samsung falsely advertised its phones as waterproof. Samsung attempted to compel arbitration on the basis that its terms and conditions required the dispute to be resolved through that dispute resolution mechanism.

Two California district courts declined to send the cases to arbitration, at which point Samsung appealed to the Ninth Circuit and requested that the cases be heard together.

Samsung argued that arbitration is required because the terms and conditions containing the arbitration clause were referenced on the product box and the arbitration provision was printed in the pamphlet provided inside the smartphone box.

The Ninth Circuit held that purchasers of the phone could not be deemed to have agreed to an arbitration provision provided in a pamphlet inside the product box because these provisions were "inconspicuous" and "contained in a document whose contractual nature is not obvious." 

Affirming the lower court, the appeals court ruled "the inaptly titled booklet containing the terms and conditions and the smartphone packaging’s vague reference to terms and conditions were insufficient to put a reasonable consumer (or a reasonably prudent smartphone user) on notice of the arbitration provision that Samsung seeks to enforce."

In support of its decision, the appeals court cited Norcia v. Samsung Telecomms. Am. LLC for the proposition that inaction does not equate acceptance of a contract. In Norcia, the Ninth Circuit had similarly ruled that an arbitration provision beginning on page 15 of a manufacturer’s warranty was not binding on purchasers of the product. That case, the court noted, forecloses Samsung’s argument that California has adopted an "in-the-box" theory of contractual acceptance.

Key Takeaways

Samsung has faced a great deal of flak over allegations its marketing of the Galaxy S7 as waterproof is deceptive, as previously covered here. Now, this false advertising class action can move forward despite Samsung’s attempt to invoke the arbitration provisions. This decision is a repudiation by the Ninth Circuit of what counsel for Samsung had called the company’s "belt and suspenders"approach to informing customers about arbitration notices.

Companies wishing to compel arbitration in the Ninth Circuit should note its judges will require at least a "clear statement" on the product booklet informing customers they must agree to the company’s terms and conditions in order to use the purchased product. It is not enough to notify customers about arbitration provisions by pointing to a booklet inside the product box that contains the provision.

Cumberland Farms Faces Class Action over Misleading Ice Cream Marketing

Is a vanilla flavor the same thing as vanilla? Not according to the plaintiffs in a suit against an ice cream maker over the ingredient "natural flavor." 

The class action complaint alleges Cumberland Farms mislabeled several of its Farmhouse Creamery Deluxe ice cream flavors as being, or containing, "vanilla ice cream." The suit centers on the fact that, according to the ingredient lists, the products contain "natural flavor." 

According to the complaint, the use of "natural flavor" means that the ice cream is "not flavored only by vanilla but contains flavors derived from not-vanilla sources," a crucial distinction that, according to plaintiffs, makes the "vanilla" label "misleading to consumers." Accordingly, the complaint alleges violations of state consumer protection and unfair and deceptive trade practice laws, among other things.

In the complaint, plaintiffs assert that the term vanilla, when used to label food, has a very specific meaning. Specifically, consumers expect vanilla ice cream to be "exclusively flavored by real vanilla derived from the vanilla plant, [to] contain a sufficient amount of vanilla to characterize the food, [and to have] vanilla flavor or vanilla extract designated on the ingredient list," according to the complaint.

In contrast, "natural flavor," plaintiffs contend, is commonly used in products that do not contain pure vanilla.

The complaint avers that, due to the use of "natural flavor," the ice cream should have been labeled "vanilla-flavored ice cream," and that the labeling of the ice cream as "vanilla ice cream" gives consumers the false impression that the products contain only real vanilla. Contributing to the confusion, plaintiffs say, the use of the term "natural flavor" rather than "vanilla with other natural flavors" in the ingredient list "fails to dispel ambiguity and reinforces the front-label impression as to a greater amount of the characterizing ingredients." 

The complaint alleges that the defendants mislabeled the products in order to deceive consumers into thinking they were purchasing a product flavored entirely with real vanilla.

The complaint goes on to allege that Cumberland Farms used various other methods to give consumers the impression that the product was made entirely with real vanilla when it was not. Those tactics included the use of natural food coloring that gave the ice cream a more caramel color and the description of the product as "French vanilla." 

The plaintiffs seek class action certification and to receive injunctive relief and damages.

Key Takeaways

As consumers become more aware of and concerned about the ingredients in their food, allegations such as these against Cumberland Farms should cause all food manufacturers to take notice. Case in point – just last week we covered an ongoing class action suit against Hershey over its allegedly deceptive inclusion of artificial flavoring in chocolates.

Here, plaintiffs contend that use of the word vanilla on a product label is deceptive not because real vanilla is not contained in the product but because it is not the only flavor included to get the vanilla taste. The alleged deception lies in making consumers think they got more “real vanilla than they actually did.” Companies selling food products should carefully consider their product labeling to ensure it accurately reflects the contents of the products.

Perdue Clucks Victory at NAD over "Raised Cage Free" Artwork Challenge

Following a competitor challenge and subsequent investigation, the National Advertising Division (NAD) determined that marketing claims that Perdue’s chickens are “raised cage free” presented alongside images of chickens openly grazing in a field on the product packaging do not convey any misleading implied claims.

In this battle of the chicken brands, Tyson’s Chicken challenged claims about Perdue’s "raised cage free" chicken. At issue was not the claim itself, but the context in which it was presented: Tyson’s argued that due to the inclusion of artwork of chickens grazing in the fresh air, the ads created an unsupported implied claim the chickens are raised in conditions like the ones depicted in the marketing artwork which, in fact, they are not.

For its part, Perdue said the artwork was "simply decorative" and did not make any such implied claim.

After reviewing evidence provided by both companies, including consumer perception surveys about the artwork, NAD agreed with Perdue. NAD found the consumer perception survey submitted by Perdue demonstrated that none of the implied claims alleged by Tyson were conveyed in the advertising and ruled that Perdue could continue running the ads.

NAD also reasoned the "cartoonish" nature of the marketing art showing the chickens in the "open field" was "decorative and atmospheric," an abstract depiction that consumers would be hard-pressed to confuse with a realistic "depiction of the actual conditions under which Perdue’s chickens are raised." 

NAD found Perdue’s consumer review survey "was sufficiently reliable to demonstrate that consumers did not reasonably take away unsupported implied messages that Perdue’s chickens were raised in conditions other than ‘cage free’ as is stated in the text of the labels." 

Delving into Perdue’s survey methodology, NAD noted consumers viewed the package together with the artwork as a whole, and that nothing about the survey consumers’ perceptions indicated that after viewing the artwork they thought the chickens were raised in conditions similar to those depicted in the packaging.

Furthermore, even though there was no evidence presented about consumer perception of the contested artwork as featured on television and online, NAD determined that the glimpse of the artwork in those mediums also "did not reasonably convey an unsupported implied message about Perdue’s chicken raising practice."

Conversely, NAD was unconvinced by perception evidence provided by Tyson to support its allegations because it found the study "artificially directed" participating consumers to direct their focus too much on the artwork.

Key Takeaways

NAD sided with Perdue based on the strength of its consumer perception survey, whose methodology it found impartial and whose results showed that consumers did not take away the implied message asserted by Tyson.

Playing into all this may have been Tyson’s own recent false advertising troubles with two consumer advocacy groups asserting Tyson falsely advertised its chicken as raised using humane and sustainable practices.

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