On May 15, 2017, the FTC filed a Complaint in Federal Court against Strategic Student Solutions and a number of related companies that claim to provide debt relief services. According to the Complaint, rather than providing the advertised services, the defendants pocketed thousands of dollars in fees from consumers without providing any debt relief services. In essence, despite promising to reduce or eliminate student debt, the defendants simply took consumers’ money without providing any debt reduction service, leaving consumers in a worse financial situation. The Federal Court for the Southern District of Florida recently granted the FTC’s request for a preliminary injunction preventing the defendants from engaging in these business practices.

According to the Complaint, the defendants targeted consumers struggling with student loan debt and charged consumers up to $1200 in initial fees and an additional $49.99 per month with the promise that defendants would enroll the consumer in a loan forgiveness or payment reduction program. The defendants also allegedly promised that they would apply any fees paid to them to the consumers’ debt in the loan forgiveness program and that if consumers simply made monthly payments to defendants for three years the loan would be forgiven. According to the FTC, none of this was true—other than the fees paid by consumers to defendants. In fact, rather than forgiveness or reduction, many consumers allegedly had their debt increase while using defendants’ “services.” And when a consumer attempted to cancel their participation in the defendants’ program, the defendants allegedly lied to consumers by stating if they cancel, they will not be able to enroll in a different loan forgiveness program.

After making these false promises, according to the Complaint, the defendants had consumers sign contracts with disclaimers contradicting the sales pitch. For example, the contracts stated “I understand that the fees paid to Strategic Student Solutions is [sic] for Document preparation and consultation services only and will not be applied to my student loan balance.” However, as detailed previously on this blog, the FTC does not give much weight to disclaimers buried in a contract, especially where it is directly contrary to explicit advertising claims.

The FTC alleges that defendants’ scheme violated the FTC Act, the Telemarketing Sales Rule, and the Credit Repair Organizations Act and is seeking restitution for the money taken from consumers and a permanent injunction ceasing defendants’ scheme.

Last week the FTC issued three letters closing three separate investigations of advertising practices by three different businesses. The letters are notable for the two common themes present in each. First, each investigation centered on allegedly unsupported “Made in the USA” claims, demonstrating the FTC’s continued vigilance on this issue–a point that has been the topic of past posts. Second, each investigation was closed without further action due to, at least in part, the advertisers’ willingness to cooperate and take remedial action to change is advertising practices.

Made in the USA Banner
Copyright: lifeking / 123RF Stock Photo

These investigations demonstrate that the FTC will continue to enforce its rules regarding “Made in the USA” claims. According to the FTC, a blanket, unqualified claim that a product is “Made in USA” is likely to suggest to consumers that the product was “all or virtually all” made in the United States. So the FTC will hold an advertiser to that standard. In fact, the FTC stated in its Enforcement Policy Statement on the matter (as we blogged about here) that if “a product is not all or virtually all made in the United States, any claim of U.S. origin should be adequately qualified to avoid consumer deception about the presence or amount of foreign content.” And as the recently closed enforcement investigations show, if some of your products are made in the USA, but some are not, the advertising should be clear as to which ones are made here and which ones are imported.

These now-closed investigations also demonstrate an important practical point in dealing with the FTC. In each of these investigations, the advertiser cooperated and agreed to take remedial action, including altering the advertising at issue, training employees regarding the proper and substantiated advertising claims, and taking steps to clear the marketplace of the prior claims. This demonstrates that cooperating with the FTC’s investigation and coming to an agreement on revised advertising could be the most effective route in dealing with an FTC investigation in some circumstances.

 

In December 2016, the Consumer Review Fairness Act became law. On February 21, 2017, the FTC published guidance for businesses in following the new law. The law protects the consumer’s right to express and share his or her honest review of a company or its products, even if the review is negative. To accomplish this, the law targets contractual provisions used by companies to stifle negative reviews. The law specifically prohibits any such provisions, whether in online terms and conditions or in some other contract.

18572446 - stylized illustration of somone with a hood gesturing symbol of silence with finger on lips

The law makes it illegal for a company to use a contract provision in a “form contract” that:

  1. Prohibits or restricts the ability of an individual who is a party to the contract to review the company’s products, services, or conduct;
  2. Imposes a penalty or a fee against an individual giving a review; or
  3. Requires individuals to give up their intellectual property rights in the content of their review.

The law provides that any such provisions in a form contract are void, barring some specific exceptions. The law also exposes companies using prohibited contractual provisions to FTC enforcement actions, including potential financial penalties.

To ensure compliance and avoid enforcement actions, the FTC recommends that businesses: (1) “review their form contracts and online terms and conditions; and (2) remove any provision that restricts people from sharing their honest reviews, penalizes those who do, or claims copyright over people’s reviews (even if you’ve never third to enforce it or have no intention of enforcing it.)”

As stated by the FTC: “The wisest policy: Let people speak honestly about your products and their experience with your company.”

The FTC recently cracked down on Breathometer, Inc., the maker of an app-supported smartphone breathalyzer, for false and deceptive advertising.

The advertised purpose of the product is to keep people safe—to let someone know when he/she has had too many to drive, and provide an estimate on when sobriety will return.  The device, which connects to an app on a smartphone, allows the user to blow into it and receive a blood-alcohol content reading on their phone.  The accuracy of the reading, however, is in dispute – and it appears the advertisements may have overstated the accuracy of the BAC reading.

In its advertising, Breathometer touted “FDA registered, Law enforcement grade accuracy” and “‘police grade’ precision.”  The advertising went on to claim that the accuracy was proven by “government-lab grade testing.”  According to the FTC’s complaint, these claims were not supported, or outright false.  The FTC alleged that the product was not adequately tested for accuracy and that the company was aware that the device regularly understated users’ BAC – in other words, informing drunk people that they were sober to drive.

Now a settlement with the FTC has imposed strict restrictions on the conduct of the company and its founder going forward.  The company and its founder are prohibited from making claims regarding the accuracy of the product without the support of specifically outlined testing demonstrating it “meets the accuracy specifications set for evidential breath alcohol testers that have been approved by the Department of Transportation.”  In fact, without such testing support, the company cannot advertise that the product detects BAC at all, and is prohibited from “re-enabling the Breathometer app’s breathalyzer functions” which were previously shut down.

In addition, the company must give a full refund to everyone who bought the product – wiping out approximately $5.1 million in revenues.  The company is required to specifically notify its customers by email of their right to a refund, and post refund information on its website.

Ever been skeptical of symptom relief claims made by medicine made of things like crushed bees or poison ivy?  It seems you are not alone–the FTC is skeptical too, and a recent FTC announcement may leave marketers scrambling to change the claims made on homeopathic drugs.

Homeopathy, dating to the 1700s, is based on the theory that disease symptoms can be treated by minute doses of substances that produce similar symptoms when provided in larger doses to healthy people.  While many people believe in these remedies, the efficacy claims for these products are generally not supported by modern scientific methods and are generally not accepted by modern medical experts.

Last week, the FTC released an Enforcement Policy Statement on Marketing Claims for OTC Homeopathic Drugs.  In the statement, the FTC provided specific guidelines for marketing the efficacy of homeopathic remedies.  The FTC acknowledged it has historically not pursued many enforcement actions against homeopathic marketers, but stressed that the same rules apply to marketing homeopathic drugs as other health-related products, and indicated its lax enforcement may be a thing of the past.

Copyright: <a href='//www.123rf.com/profile_kerdkanno'>kerdkanno / 123RF Stock Photo</a>Generally, an advertiser is required to have adequate substantiation for any claim, but the substantiation that qualifies as “adequate” is more demanding for health-related claims.  For health-related claims, an advertiser must have “competent and reliable scientific evidence” to support the claim.  And for claims that a product can treat or prevent a disease or its symptoms, the FTC has required support in the form of well-designed human clinical testing.  This is a real problem for homeopathic drugs—most have absolutely no scientific support for their treatment claims (let alone the human clinical testing required).

So what is a marketer to do – how can you identify what the homeopathic drug supposedly treats without saying (expressly or implicitly) that it is effective at doing so?  After all, for the vast majority of homeopathic drugs, the case for efficacy is based solely on traditional homeopathic theories and there are no valid studies using current scientific methods showing the product’s efficacy.  So just making a treatment claim could violate the regulations.  The answer according to the FTC: disclaimer, disclaimer, disclaimer.

The FTC is recommending that homeopathic drug marketing include disclaimers that consist of at least two components: (1) a statement that there is no scientific evidence that the product works and (2) a statement that the treatment claims are based only on theories of homeopathy from the 1700s that are not accepted by most modern medical experts.  And it is not enough to put these disclaimers in the fine print.  As stated by the FTC any disclaimer “should stand out and be in close proximity to the efficacy message; to be effective, it may actually need to be incorporated into the efficacy message.”  The FTC also warns against marketers attempting to spin this into a positive; says the FTC: “Marketers should not undercut such qualifications with additional positive statements or consumer endorsements reinforcing a product’s efficacy.”

The FTC’s new guidance helps define clear rules and puts marketers on notice of the pitfalls of marketing homeopathic products.  If in doubt about whether a advertising message is misleading, consider consulting an attorney and obtaining consumer surveys to ensure the advertisement is clear and not misleading.

The Food and Drug Administration recently invited public comment on an updated definition of what constitutes a “healthy” food.  An updated definition is not merely fodder for food policy gurus.  This will have a very real impact on advertisers and consumers alike because the new standard will set the stage for what brands will label and advertise as “healthy.”

What is “healthy” under the current definition—which reflects decades old views on nutrition—may no longer be “healthy” after the FDA’s final determination. Perhaps that is a good thing.  Take, for example, that some sugary breakfast cereals and pastries could be considered “healthy” under the current guidelines—which focus on overall fat content rather than sugar content—but things like fresh avocados and nuts are not considered “healthy” because of their fat content.

Copyright: dole / 123RF Stock Photo
Copyright: dole / 123RF Stock Photo

The FDA’s new guidance will likely force many brands to rethink and retool how they advertise their previously “healthy” (but suddenly not “healthy” anymore) products. On the flip side, the new definition could well breathe new life into a languishing product or push emerging products to even greater market prowess that will be suddenly considered “healthy” by the FDA.  According to the FDA, many consumers make their purchasing decisions in 3-5 seconds.  So, by that data, most folks are not loitering in the florescent lights of a big box supermarket comparing nutrition tables.  While the details may not be a focus to consumers, a big catchy label clearly stating that something is “healthy,” could make the difference between buying Brand X or Brand Y.

Perhaps most importantly, brand owners and the public will have a say on the final definition of “healthy.” The FDA is currently seeking input on a variety of questions about what “healthy” should mean – both from a nutrition standpoint and from a consumer’s understanding standpoint.  The public comment period opened on September 28, 2016, and comments can be submitted through the FDA’s website.

The FTC has long required that if an advertiser makes a specific, verifiable claim, the advertiser needs to have adequate substantiation for the claim before it is made. One of the more interesting and recognizable examples of this rule came on December 1, 2015, when the FTC announced a proposed settlement with Tommie Copper for its claims that its products—copper-infused compression clothing—relieve pain.  Tommie Copper’s advertisements claimed that its copper-infused compression clothing provides pain relief from a number of conditions.  In fact, the company proclaimed that its products provide pain relief comparable to, or better than, drugs or surgery.  For example, its infomercials featured Montel Williams declaring “Tommie Copper truly is pain relief without a pill.”  The advertisements also claimed relief from chronic pain and pain caused by multiple sclerosis, arthritis, and fibromyalgia, relying on some purported customer testimonials.

Copyright: dolgachov / 123RF Stock Photo (Not actually Tommie Copper apparel)

But, based on the 2015 proposed settlement, it appears that Tommie Copper did not have much support for these lofty claims.

The settlement, which will cost Tommie Copper at least $1.35 million, served as a reminder that before making any advertising claim, the advertiser must have adequate substantiation for the claim.  And the bar is higher for medical claims.  As the proposed settlement explains, before the company can make health-related claims related to chronic or severe pain, diseases, drugs, and surgery, it must have “competent and reliable scientific evidence” to support the claims.  FTC v. Tommie Copper, Inc., 7:15-cv-09304-VB, Dkt. 4-1 (S.D.N.Y. Dec. 1, 2015).

The proposed settlement specifically defined “competent and reliable scientific evidence” as “human clinical testing . . . based on standards generally accepted by relevant medical experts” that is “(1) randomized, double-blind, and placebo-controlled; and (2) . . . conducted by researchers qualified by training and experience to conduct such testing.”  Id.  The proposed settlement also prohibits the use of other health-related claims without substantiation from tests, analysis, research, or studies conducted by qualified persons in a manner that is generally accepted in the profession to be accurate and reliable. Id. The monetary judgment in the proposed settlement is a whopping $86.8 million, although Tommie Copper need only pay $1.35 million now.  The remainder of the judgment is suspended based on, among other things, the company’s representations regarding its finances.

Though the facts and circumstances of every advertisement will determine what amount and type of substantiation is required, this settlement shows the FTC will require “competent and reliable scientific evidence” when making health-related claims to consumers.

 

It says “sale,” but is it a bargain?  According to a number of class action lawsuits filed in recent years, the answer is no.

The situation is this:  You go to the store.  You see a nifty looking widget and HOLY BUCKETS it is 50% off!  But are you really getting a deal?  If the store is following the law, you are…but a recent series of putative class action lawsuits have alleged that the deal might be no deal at all.

The past few years (and 2015 in particular) have seen a significant number of class action lawsuits filed against retailers across the country for allegedly false and misleading price advertisements.  The lawsuits generally claim that the retailer advertised products as on “sale” or “discounted” from higher, “original” or “former” prices when in reality the product was always on sale.  The lawsuits allege that the phantom or sham markdowns are part of the retailers’ scheme of giving the false and misleading illusion of a discount to entice sales.

Copyright: petrnutil / 123RF Stock Photo
Copyright: petrnutil / 123RF Stock Photo

So what is the rule? How do you accurately advertise a sale?  The standards can vary from state to state, but intentionally creating a misleading or false illusion of a discount is likely a problem.  The Federal Trade Commission’s guidelines are a good starting point and guidepost for advertisers.  With respect to advertisements comparing a former price to the current price, the regulations promulgated by the FTC provide:

“One of the most commonly used forms of bargain advertising is to offer a reduction from the advertiser’s own former price for an article. If the former price is the actual, bona fide price at which the article was offered to the public on a regular basis for a reasonably substantial period of time, it provides a legitimate basis for the advertising of a price comparison. Where the former price is genuine, the bargain being advertised is a true one. If, on the other hand, the former price being advertised is not bona fide but fictitious — for example, where an artificial, inflated price was established for the purpose of enabling the subsequent offer of a large reduction — the ‘bargain” being advertised is a false one; the purchaser is not receiving the unusual value he expects. In such a case, the ‘reduced’ price is, in reality, probably just the seller’s regular price.

“A former price is not necessarily fictitious merely because no sales at the advertised price were made. The advertiser should be especially careful, however, in such a case, that the price is one at which the product was openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of his business, honestly and in good faith — and, of course, not for the purpose of establishing a fictitious higher price on which a deceptive comparison might be based. And the advertiser should scrupulously avoid any implication that a former price is a selling, not an asking price (for example, by use of such language as, ‘Formerly sold at $XXX’), unless substantial sales at that price were actually made.”  16 CFR §233.1(a) and (b).

The FTC has similar regulations and guidelines for comparisons to prices charged by competitors ( 16 CFR §233.2), advertising against an MSRP (16 CFR §233.3), bargain sales—e.g. two for the price of one—(16 CFR §233.4), and “miscellaneous” price comparisons (16 CFR §233.5). 

While the FTC regulations are a good start, and advertiser should consult the laws in the state(s) in which they will advertise.  For example, advertisers in California should be particularly aware of California Business and Professions Code Section 17501, which sets out a specific rule for when and how a discounted price may be advertised:

“No price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price as above defined within three months next immediately preceding the publication of the advertisement or unless the date when the alleged former price did prevail is clearly, exactly and conspicuously stated in the advertisement.”

Failing to comply with these advertising laws can translate into a risk to the bottom line, and advertisers should take steps to make sure they do not become the target of a lawsuit or FTC enforcement action. When in doubt regarding whether a promotion complies with the applicable rules, consult with a qualified attorney.

You’ve done your due diligence and you are sure that the content of your advertisement is accurate and fully substantiated with reliable data. All good, right? Not necessarily.

It’s a good first step – but the FTC and advertising laws are not limited to content, they also require that the context and presentation of the advertisement not be misleading or deceptive. The FTC recently re-affirmed this rule in explaining its standards for so-called “native advertising.”

Copyright: adiruch / 123RF Stock Photo
Copyright: adiruch / 123RF Stock Photo

Native advertising is advertising that matches the design, style, and behavior of the digital media in which it is disseminated. One aim of a native advertisement is to blend in with the organic content of a website. Native advertising has been on the uptick in the past several years as advertisers try to convince increasingly savvy internet users to click on their advertisements. According to the FTC, however, a well-designed native advertisement may well be impermissibly deceptive.

In its recent pronouncement, the FTC did not rewrite the rules applicable to contextual advertising; but it made clear that the rules apply to native advertising just like all other advertising.

So what are the rules and what should be done to ensure compliance with them?

According to the FTC, the rule is as follows:

“Deception occurs when an advertisement misleads reasonable consumers as to its true nature or source, including that a party other than the sponsoring advertiser is the source of an advertising or promotional message, and such misleading representation is material.”

Pretty simple – all expect for what qualifies as “material.” Fortunately, the FTC provides a definition of what they consider material:

“[A] misleading representation is material if it is likely to affect the consumers’ choices or conduct regarding the advertised product or the advertisement, such as by leading consumers to give greater credence to advertising claims or to interact with advertising with which they otherwise would not have interacted.”

In other words, if the context and design of the advertisement misleads consumers into believing it is not an advertisement paid for by the advertiser, it very well may be deceptive under the FTC’s rule.

So what factors can an advertiser consider in developing a native advertisement?

Consider the entire context surrounding the advertisement. In assessing whether an advertisement is misleading, the FTC will consider the net impression of the advertisement, not just the statements in isolation. The FTC will “scrutinize the entire ad, examining such factors as its overall appearance, the similarity of its written, spoken, or visual style to non-advertising content offered on a publisher’s site, and the degree to which it is distinguishable from such other content.”

Consider the target of the advertisement. In some circumstances, the target audience for an advertisement will be an important consideration. For example, the FTC may apply different considerations to advertisements directed at children versus those directed at educated, sophisticated consumers.

Consider using a clear disclosure. Time and again, the FTC has suggested or required the use of a clear disclosure that an advertisement disguised as something else is, in fact, an advertisement. The classic example is the use of the word “ADVERTISEMENT” in sufficiently large and clear text on an advertisement in a newspaper that is disguised as a news article. Such disclosures will not always be sufficient – it will always depend on the full context of the advertisement.      

Don’t rely on the consumer “figuring it out” later on. The FTC considers deception harmful and illegal even if the consumer can later figure out that what he or she just clicked on was an advertisement by, for example, looking at the landing page or speaking to a sales representative. Curing the deception after the fact is, under the FTC’s guidelines, likely insufficient.

Read and know the rules. A good starting place is to read the FTC’s Enforcement Policy Statement on Deceptively Formatted Advertisements. And when in doubt, consult with an attorney experienced in advertising law.