Stay ADvised: 2025, Issue 4
In This Issue:
- FTC Settles Beef With GrubHub Over Buffet of Allegedly Deceptive Practices
- Diaper Advertiser Absorbs the Loss as NAD Sides With Huggies' Maker
FTC Settles Beef With GrubHub Over Buffet of Allegedly Deceptive Practices
Food delivery service GrubHub will pay $25 million in a pre-New Year settlement with the Federal Trade Commission (FTC) and has agreed to make comprehensive changes to its business practices to resolve charges that it engaged in a variety of deceptive practices that harmed businesses and consumers. The FTC and the Illinois Attorney General had alleged that GrubHub baked into its business model deceptive practices meant to give it a competitive edge and pad its bottom line. These practices came in three flavors, according to the complaint: deceptive pricing tactics that misled consumers about added delivery fees, fake restaurant affiliations, and deceptive claims to drivers about potential earnings.
The complaint alleged that GrubHub played bait-and-switch with its delivery fees, enticing consumers with claims of low-cost or free delivery throughout the ordering process—until consumers got to the payment page. There they would find a total price that included additional previously undisclosed fees, characterized as "service fees" or "small order fees." Even subscribers to GrubHub who are promised "free delivery" or "$0 delivery" fell prey to additional cost because, the FTC alleged, GrubHub charged them the same undisclosed delivery fees.
The FTC and Illinois Attorney General alleged that the company knew that its advertising was deceptive, with the complaint indicating that executives called the arrangement a "pricing shell game."
The government also alleged that GrubHub grew its platform by falsely misrepresenting its relationship with hundreds of thousands of restaurants that in fact had no affiliation with GrubHub. According to the complaint, GrubHub would list these restaurants in its platform without their permission and accept orders from diners for those restaurants – resulting in higher charges for the diners, delivery delays, order cancellations and other problems. GrubHub's deception also allegedly harmed restaurants as consumers blamed them for GrubHub delivery delays and order problems. The government alleged that at one point more than half of the restaurants on GrubHub's platform were unaffiliated and included without permission.
Finally, the complaint charges that GrubHub misled workers by falsely representing their potential earnings. Its advertisements allegedly promised hourly rates that most drivers could not realistically expect to make. For example, in New York, GrubHub advertised that drivers could earn up to $40 an hour when most drivers earned about $10 an hour. Even when the company received the FTC's Notice of Penalty Offenses warning it about such deceptive earnings representations, it continued making these promises.
The complaint tops off the allegations with other charges of deceptive practices, including that the company made it hard for subscribers to cancel and that it failed to honor gift cards, blocking the accounts of customers with large gift card balances.
The proposed settlement lowers the $140 million agreed-to judgment to $25 million based on the company's apparent inability to pay. GrubHub must also change its recipe for representations by promising to disclose the real cost of deliveries and to stop adding junk fees, providing simple cancellation mechanisms, not listing unaffiliated restaurants, and refraining from making misleading earnings claims.
Key Takeaways
It is no coincidence that the settlement was announced alongside the issuance of the FTC's junk fee rule in the waning days of the Biden Administration. Although the FTC may remain interested in non-disclosed fees, advertisers may want to focus on Commissioner Ferguson's dissent here—and in prior cases, especially given he is the agency's new chair. Key points—we are likely to see far less use of those Notice of Penalty Offense letters and allegations prevalent these past few years, a return (perhaps) to an "appreciable number" standard for "up to claim," and a disinclination to collapse claims under Section 5 for deceptive acts and practices with those for unfair methods of competition.
Diaper Advertiser Absorbs the Loss as NAD Sides With Huggies' Maker
The marketing team for Zuru Edge Limited ("Zuru"), maker of Rascals + Friends and Minnie Moon diaper brands/products, may soon have to go back to the drawing board as the National Advertising Division (NAD) sided almost entirely with challenger Huggies' manufacturer Kimberly-Clark Corporation.
Kimberly-Clark argued that certain of Zuru's advertising, product demonstrations, and endorsements for its Rascals and/or Millie Moon diapers on billboards, product packaging, and social media are misleading. It took issue with claims that Zuru's diapers are more absorbent, among other things.
In particular, Kimberly-Clark challenged the claims made in two similar product demonstrations posted on Tik-Tok, Instagram, and YouTube showing that Zuru diapers could hold 5 cups of water, unlike diapers from Huggies, Pampers, and LUVs (although the video did not identify the specific product being tested from the competing brands). In the video, an influencer poured 5 cups of water onto a Zuru diaper and the diaper absorbed all the liquid yet stayed dry. A second version was pretty much the same except that it also subjected competitors including Huggies to the same treatment and showed that the Zuru diapers were the only ones to stay dry.
NAD found that the claims in both the monadic and comparative product demonstrations were unsupported and recommended they be discontinued. NAD emphasized that when a product demonstration is presented as visual proof of how a product will perform, any such demonstration must be presented accurately with any material conditions or limitations clearly disclosed to consumers. The videos used water to "prove just how absorbent" the diapers are, yet NAD agreed with Kimberly-Clark that a diaper's ability to absorb water is not what determines how much urine it will hold given the products' different absorbent materials and further that reasonable consumers are unlikely to know that urine and water have different absorption profiles.
Additionally, the videos tied the demonstrations to the diapers' performance and promoted that performance as a reason consumers should purchase Zuru diapers. Thus, one reasonable message consumers could take away is that Zuru diapers can absorb 5 cups of urine. However, Zuru's evidence did not support this claim. A Diaper Testing International ("DTI") report submitted by the advertiser failed to provide the full details of testing methodology and used inconsistent rounding rules, which put into question the reliability of the results.
Next, NAD analyzed the claim that Rascals diapers are "Our #1 absorbing diaper," which appears on product packaging. Kimberly-Clark argued the claim is misleading because "#1" and "absorbing" deliberately stand out, giving the impression that the Rascals diaper is the #1 absorbing diaper, not the brand's #1 absorbing diaper.
NAD agreed. First, the product graphics made the word "our" easy to miss—featuring a smaller font size and a color choice that muted the word. This made it appear as if the claim being made was that the diaper was the "#1 absorbing diaper."
Second, NAD did not buy Zuru's explanation that the claim was a comparison between Rascals and Millie Moon. The claim itself was misleading because the Rascals product range only includes one diaper line, rendering the idea that the brand was comparing its own diapers unconvincing. A proposed modification to update the claim so that it clarified that the comparison is to other Zuru products didn't cure the misleading claim either. Even if Zuru could communicate that the claim was a comparison to Millie Moon, consumers tend to understand that superlative claims like "#1" compare multiple products in one line or multiple product lines. Neither was the case here.
Zuru's evidence supported neither the claim that it makes the "#1 absorbing diaper" nor that Rascals is more absorbent than Millie Moon, again due to flaws in the DTI testing, which failed to show how testing results were statistically significant.
Kimberly-Clark also argued that several influencer posts for Zuru diapers lacked proper disclosures of material connections with the brand. It challenged the reuse of endorsements from sponsored magazine articles that did not disclose a material connection, specifically referring to a reuse by an influencer of content from the blog Motherly: the influencer in the demonstration states that "Motherly was right. These are the softest diapers I've ever felt."
The challenger argued that "the pattern of influencers picking up and parroting claims from sponsored content in social media without proper disclosures blurs the line between advertising and editorial content, an issue that is the focus of the FTC and NAD."
Zuru argued that the Motherly article itself had a disclosure that the content was sponsored by Millie Moon. It also noted that it had no control over these ads which were posted without its approval and that the ads were made either without any contact or renumeration from Zuru or that they stated that the post was a "collaboration."
In this case, NAD determined that although third-party advertisements should include a clear and conspicuous disclosure of material connections to the brand, Zuru could not be aware of every statement made on social media about its product and that Zuru had provided enough evidence that it had a strong compliance and monitoring program in place. Thus, in reliance on Zuru's assurance of compliance with the FTC endorsement guidance and its efforts to take down nonconforming posts, the NAD elected not to further address the challenged social media posts.
NAD also recommended that Zuru discontinue the claims of "world's softest diaper" and "say goodbye to blowouts."
Key Takeaways
The case is yet another example of the close look NAD takes at product demonstrations, in furtherance of its mantra that product demonstrations must not overstate results or differences and must fairly and accurately reflect the results that consumers would typically experience in the real world.