U.S. Federal Trade Commission (FTC)

What does “natural” mean in the context of product advertising?  Consumers see phrases like “natural,” “all natural,” and “100% natural” over and over again in modern marketing.  The trouble is that “natural” may not mean what consumers expect it to mean, thereby opening companies up to claims of false or misleading advertising.

Two recent lawsuits against Pret A Manger, the sandwich company, provide a cogent illustration.  One complaint was filed by two consumers as a class action.  The other was filed by three non-profit organizations (including the Organic Consumers Association) on behalf of their members and the general public.  Both complaints assert that Pret A Manger has deceptively labeled, marketed, and sold certain bread and other baked goods as “Natural Food” when the products contain trace amounts of a chemical biocide.  According to the non-profit plaintiffs, consumers are willing to pay more for “natural” products and consumers expect such products to be free of pesticides.

This isn’t the first time the Organic Consumers Association, the Federal Trade Commission, or others have gone after companies advertising their products as “natural.”  Companies should be mindful when marketing their products using that term, and should be prepared to defend the claim with substantiation if necessary.

 

The FTC has amended its Jewelry Guides (formally, the “Guides for the Jewelry, Precious Metals, and Pewter Industries”) which aim to help prevent deception in jewelry marketing by providing clear standards.

The Jewelry Guides, like other industry guides published by the FTC, are intended to help marketers understand their responsibilities with respect to avoiding consumer deception.  The Guides themselves are not binding law, but instead offer the FTC’s interpretation of how Section 5 of the FTC Act applies to certain practices within the industry.

For those in the jewelry industry, the issuance of these changes suggests it may be a good time for a compliance check.  Some noteworthy changes include:

  1. No more thresholds for describing alloys as “gold” or “silver.”

Under the old Guides, marketers were prohibited from using the terms “gold” and “silver” to describe a product made of a gold or silver alloy (combination of gold or silver and one or more other precious metals) unless the ratio of gold/silver to other metals met certain minimum thresholds.

The revisions eliminate these requirements.  From now on, any gold alloy may be marketed as “gold” as long as the marketing contains “an equally conspicuous, accurate karat fineness disclosure.”  The same goes for silver alloys as long as the marketing contains a conspicuous and accurate disclosure of the parts-per-thousand measurement.

  1. New requirements for describing silver- and platinum-coated products.

A preexisting rule advises against using the term “gold” to describe a product that is merely gold-coated.  The revised Guides extend this rule to silver and platinum products.

  1. New rule prohibiting the use of incorrect varietal names to describe gemstones.

The FTC now expressly prohibits the use of incorrect varietal names like “yellow emerald” or “green amethyst” to describe gemstones.  Instead, marketers should use scientifically-correct terms like “heliodor” and “prasiolite.”

  1. Relaxed rules for lab-grown diamonds and gemstones.

The revisions make several changes to the rules for marketing lab-grown diamonds and gemstones.  For the most part, these changes benefit the lab-grown sector.  For instance, the FTC now cautions marketers not to use the terms “real, genuine, natural, or synthetic” to imply that a lab-grown diamond “is not, in fact, an actual diamond.”

The Guides still prohibit the use of terms like “real” and “natural” to describe lab-grown diamonds and gemstones, but the FTC indicated that it might be willing to reconsider this position.

When hoping to resolve advertising concerns or disputes quickly and easily, companies should not only consider utilizing the National Advertising Division (“NAD”), but also the potentially lesser-known Electronic Retailing Self-Regulation Program (“ERSP”).  ESRP is a self-regulatory program administrated for the Advertising Self-Regulatory Council (“ASRC”) by the Council of Better Business Bureaus.  The program was established in 2004 and its mission is “to enhance consumer confidence in electronic retailing by providing a quick and effective mechanism for resolving inquiries regarding the truthfulness and accuracy of claims in direct response advertising.”

Like actions before the NAD, ERSP actions provide guidance regarding certain advertisements.  ERSP is focused on reviewing direct-to-consumer advertising campaigns—largely infomercials but also radio ads, internet marketing efforts, TV shopping channel marketing, and pop-up advertising—for substantiation of claims, with the goal of preventing continued dissemination of deceptive claims.  ERSP members, as well as consumer or advocacy groups, can refer campaigns to ERSP for review, and ERSP reviews approximately 7-10 per month.  After review, ERSP may recommend that marketers discontinue making certain claims and may even alert the Federal Trade Commission about non-compliant companies.  ERSP reports that it has worked with companies to modify or discontinue use of almost 200 advertisements.

For more information, visit the Electronic Retailing Association’s website or read the ASRC’s blog posts regarding recent ERSP actions.

Failing to have adequate substantiation for advertising claims can land companies in hot water.  Case in point: The Federal Trade Commission (“FTC”) recently announced that it had settled charges against a company and its CEO related to their advertising of anti-aging products using what the FTC believed were false or unsubstantiated claims.  According to the FTC’s Complaint, Telomerase Activation Sciences, Inc. and Noel Patton (“TA Sciences”) lacked scientific evidence to support claims that their topical cream product and capsule/power product provided certain anti-aging and other health benefits.  Specifically, the FTC alleged that it was false, misleading, or unsubstantiated for TA Sciences to make the following representations about one or both products:

  • reverses aging;
  • prevents and repairs DNA damage;
  • restores aging immune systems;
  • increases bone density;
  • reverses the effects of aging, including improving skin elasticity, increasing energy and endurance, and improving vision;
  • prevents or reduces the risk of cancer;
  • decreases recovery time of the skin after medical procedures.

Additionally, the FTC alleged that TA Sciences made misrepresentations related to a paid program being independent and educational, related to consumers in its ads being independent users, and in promotional materials provided to other marketers.

The FTC alleged that TA Sciences’ conduct violated section 5(a) of the Federal Trade Commission Act, which prohibits unfair or deceptive acts, thus allowing the FTC to bring suit to enjoin such conduct.  The FTC’s suit alleged counts of (1) false or unsubstantiated efficacy claims, (2) false establishment claims, (3) deceptive format, (4) deceptive failure to disclose material connections with consumer endorsers, (5) false independent users claims, and (6) means and instrumentalities to trade customers.  The FTC’s proposed settlement order prohibits TA Sciences from making a number of representations related to these counts.  It also requires TA Sciences to notify purchasers of the products at issue about the FTC settlement order.  After a period of public comment, the FTC will decide whether to make the order final.

Of course, companies should ensure that they have adequate substantiation for advertising claims, whether health-related or otherwise.  As a reminder, the FTC requires that advertisers have a reasonable basis for advertising claims before disseminating them.  For more information regarding claim substantiation, review the FTC Policy Statement Regarding Advertising Substantiation.

Earlier this week, the Federal Trade Commission (“FTC”) announced a settlement with PayPal, Inc. over allegations that Venmo, a PayPal-owned mobile payment and social networking application, misled customers on issues relating to account transfers and privacy settings and enabled fraud through inadequate security practices.

Founded in 2009, Venmo lets users easily transfer money to one another and share information regarding such payments through a social network feed.  From a user perspective, Venmo operates a lot like any other major social media network, letting users “pay” each other in the same way you “tag” a friend in an Instagram post.  Thanks to its familiar social media-style interface and the ease with which it lets users split everyday expenses like bar tabs and rent payments, Venmo quickly became a favorite among millennials and college students.

According to the FTC, however, Venmo’s perceived simplicity was deceptive.  In a complaint originally filed against Venmo-parent PayPal in 2016, the FTC alleged that Venmo’s notification policy misled consumers and constituted a “deceptive or unfair practice” under Section 5(a) of the Federal Trade Commission Act.  Under the policy, Venmo notified users that funds were credited to their account before Venmo had reviewed and verified the underlying transaction.  According to the complaint, this practice resulting in unexpected delays and reversals.  It also created an ideal environment for fraud.  By falsely conveying to sellers that transactions had cleared, scammers were able to buy goods and services with fake or fraudulent information, leaving sellers with nothing when the transactions were ultimately reversed.

The FTC further charged that Venmo misled consumers about the privacy of information about their transactions.  Under the application’s default settings, whenever a user pays or is paid through the application, a description of the transaction and its participants is shared with all of the user’s “friends” in a social networking feed.  While Venmo offers privacy settings that let users limit who can view their transactions, it failed to accurately explain to users how those privacy settings actually work.

Additional charges alleged that Venmo misrepresented the extent to which consumers’ accounts were protected by “bank grade security systems” and violated the Gramm-Leach-Bliley Act’s Safeguards and Privacy Rules.

“This case sends a strong message that financial institutions like Venmo need to focus on privacy and security from day one,” acting FTC chairman Maureen Ohlhausen said in a statement.  “Consumers suffered real harm when Venmo did not live up to the promises it made to users about the availability of their money.”

For businesses dealing directly with consumers, this case underscores the importance of taking your duty to educate consumers about your product seriously, especially when it comes to how customer information will be used.  Such businesses should regularly review disclosures and other consumer-facing messages to ensure they are not only accurate but also consistent with reasonable consumer expectations.  And whenever costumers are given options as to how their information will be used, make sure those options are clearly conveyed and, perhaps most importantly, honor their choices.

Only a few days ago, my colleague Elizabeth Patton posted about the Federal Trade Commission’s release of its annual Data Book outlining the most recent statistical data about uses of the National Do Not Call Registry, a national database maintained by the FTC listing the telephone numbers of individuals and families who have requested that telemarketers not contact them.

Today, the FTC followed that up by issuing its biennial report to Congress on the Registry. The FTC reports that many businesses and organizations have attempted to exploit exceptions to the Telemarketing Sales Rule (TSR), and that these organizations have occasionally faced stiff civil penalties as a result. As such, companies engaged in telemarketing tactics should take the time to understand the TSR and its exceptions and make sure their practices are in compliance.

Among other things, the TSR makes it illegal for a business or individual taking part in “telemarketing” — defined as “a plan, program, or campaign . . . to induce the purchase of goods or services or a charitable contribution” involving more than one interstate telephone call — to call any phone number listed in the Registry. There is an exception, however, for calls to consumers with whom the company has an “established business relationship.” This exception allows sellers and their telemarketers to call customers who have recently made purchases or made payments, and to return calls to prospective customers who have made inquiries, even if their telephone numbers are on the Registry.

To fall within the “established business relationship” exception, the call must be to a person with whom the seller has an existing relationship based on: (1) the consumer’s purchase, rental, or lease of the seller’s goods or services or a financial transaction between the consumer and seller, within the eighteen months immediately preceding the date of a telemarketing call; or (2) the consumer’s inquiry or application regarding a product or service offered by the seller, within the three months immediately preceding the date of a telemarketing call.

According to the FTC, businesses routinely abuse this exception by engaging in calls in which the seller identified in the telemarketing call and the seller with whom the consumer has a relationship are technically part of the same legal entity, but are perceived by consumers to be different because they use different names or market different products.

Whether calls by or on behalf of sellers who are affiliates or subsidiaries of an entity with which a consumer has an established business relationship fall within the exception depends on consumer expectations. In other words, the question is whether the consumer likely be surprised by the call and find it inconsistent with having placed their phone number on the Registry. The greater the similarity between the seller and the subsidiary or affiliate in the eyes of the consumer, the more likely it is that the call will fall within the established business relationship exception.

Another issue arises when businesses place telemarketing calls to consumers after acquiring the consumers’ telephone numbers from others — so-called “lead generators” — without screening the numbers to remove those listed on the Registry. Such calls generally do not fall within the established business relationship exception because, while consumers may have a relationship with the lead generator, they do not have an established business relationship with the seller who has purchased the leads. Thus, a single sales pitch can produce multiple illegal calls, generating one or more calls from both the lead generators and the telemarketer.

The report also clarifies that the submission of a sweepstakes entry form does not create an “established business relationship” between the consumer and the company administering the sweepstakes, and notes several enforcement actions that have been brought against companies for making illegal calls that relied upon sweepstake entry forms as a basis for making telemarketing calls.

Recent actions by the FTC indicate that businesses and other organizations that use or rely on telemarketing tactics would be well-advised to review their telemarketing practices and ensure they are in compliance with the TSR and related federal regulations.

Following up on my blog post related to the Federal Trade Commission’s (“FTC”) prohibition on illegal sales calls and robocalls, today the FTC issued its National Do Not Call Registry Data Book for Fiscal Year 2017.  Now in its ninth year, the 2017 fiscal year Data Book contains “statistical data about phone numbers on the Registry, telemarketers and sellers accessing phone numbers on the Registry, and complaints consumers submit to the FTC about telemarketers allegedly violating the Do Not Call rules.”  New this year, according to the FTC, is a breakdown of robocalls versus live calls, information about the topic of those calls as reported by consumers, and a state-by-state analysis of consumer complaints.

In its press release issued today, the FTC reported that the Registry now contains over 229 million phone numbers and that there were over 7 million consumer complaints about unwanted telemarketing calls in 2017.  Of those, over 4.5 million were complaints about robocalls, which is a marked increase from the prior year.  Notably, the most frequent topic that consumers identified when submitting a robocall complaint was “Reducing Debt,” which accounted for over 700,000 of the complaints received in 2017.

As a reminder, companies should make sure to follow proper procedures when making sales calls, particularly pre-recorded sales calls, to consumers.

The Federal Trade Commission (“FTC”) operates a single National Do Not Call Registry at donotcall.gov for both personal land lines and cell phones.  Although the FTC notes that the Federal Communications Commission (“FCC”) regulations prohibit telemarketers from utilizing automated dialers to call cell phone numbers without a consumer’s prior consent, the FTC allows consumers to “register” cell phone numbers (in addition to land line numbers) on the Registry in order to notify telemarketers that they don’t want to receive unsolicited telemarketing calls.  Once a consumer registers a particular number, it will stay on the Registry until the consumer cancels the registration or discontinues service for that number.

If a consumer receives an unwanted sales call after more than 31 days have passed since placing a number on the Registry, the FTC encourages reporting that call.  However, the FTC notes that the Registry only prohibit sales calls, meaning that companies may still make certain calls like political calls, charitable calls, debt collection calls, informational calls, and telephone survey calls.  In addition, companies may make a sales call to a consumer if they have recently done business with the consumer or received written permission from the consumer.

In light of developing technology, the FTC has seen an increase in the last several years of illegal sales calls, particularly calls with pre-recorded messages and fake caller ID information known as “robocalls.”  The FTC prohibits robocalls that promote the sale of any good or service.  However, the FTC notes that certain pre-recorded messages are permitted — e.g. purely informational calls, political calls, calls from certain health care providers, calls related to collecting a debt, and calls made by banks, telephone carriers, and charities.

To combat illegal sales calls and robocalls, the FTC reports that it has sued hundreds of companies/individuals and obtained over a billion dollars, is coordinating with law enforcement and industry groups, and is pursuing the development of technology-based solutions.  According to the FTC, companies that violate the Registry or conduct an illegal robocall may be fined up to $40,654 per call.  Thus, companies should always make sure to follow proper procedures when making sales calls, particularly pre-recorded sales calls, to consumers.

Customer feedback is a two-way street.  On the one hand, positive customers reviews can inspire trust in potential new customers who might otherwise be apprehensive about purchasing products or services from an unfamiliar company.  Negative reviews, on the other hand, typically have the opposite effect.  As such, businesses may be tempted to stifle or “bury” negative customer feedback in order to preserve their reputation.  Businesses that engage in such complaint suppression tactics, however, run the risk attracting the ire of federal enforcement agencies.

For example, just last week, a federal court ruled that the Federal Trade Commission (“FTC”) is likely to prevail in its case against World Patent Marketing, Inc. (“WPM”), a business that has marketed and sold research, patenting, and invention-promotion services to consumers since 2014.  According to the FTC, WPM intimidated and threatened customers to prevent them from complaining and to compel them to retract complaints, often through cease and desist letters from WPM’s lawyers frivolously insisting that such conduct constitutes unlawful defamation or even criminal extortion.

The court agreed with the FTC that WPM’s tactics likely violate Section 5(a) of the FTC Act, which proscribes any unfair act or practice that “is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”  The court explained that complaint-suppression tactics like those employed by WPM cause substantial consumer injury “because they serve to limit the flow of truthful information” about the quality of a business’s services to prospective consumers, making it “nearly impossible for consumers to make informed decisions.”

The court also found that there are no countervailing benefits to such tactics, as “existing customers do not benefit from having their complaints suppressed and prospective consumers do not benefit from being denied access to material information.”  To the contrary, suppressing customer complaints in this manner permitted WPM  “to hinder competition and harm legitimate competitors in the marketplace.”

This case highlights a need for businesses to take special care when responding to customer complaints and negative online reviews.  However damaging a bad Yelp review may be for your business, getting sued by the federal government is certainly worse.

When done correctly, sweepstakes and prize contests can be an effective tool for building brand awareness and gaining customers.  However, businesses that fail to abide by applicable statutes and regulations when using these promotional devices can suffer disastrous consequences, including civil enforcement actions, government inquiries, or even criminal penalties.

For instance, earlier this month, the Federal Trade Commission (FTC) announced it had sent more than $532,000 in restitution payments to victims of a vacation prize scheme.  The scheme, conducted primarily by VGC Corp. of America between 2008 and 2011, involved a promotion offering expensive vacation packages to callers who correctly answered a simple trivia question.  All callers (regardless of whether they answered correctly) were told they had won the vacation package but had to pay an “administrative fee” before they could collect.  Callers were later informed of several limitations and restrictions to the offer, but only after they had already paid between $200 and $400 in fees.

This case serves as a reminder of the need for businesses that implement these kinds of marketing tactics to have at least a basic understanding of the statutory and regulatory framework.  A number of federal laws require that certain disclosures be “clear and conspicuous” in contest promotions, including but not limited to all rules and conditions of the promotion and the odds of winning any given prize.

Additional regulations may apply depending on the particular type of contest or giveaway at issue.  Promotions in which prizes are awarded to members of the public on the basis of skill or knowledge (“skill contests”), or where the gift or prize is available to all recipients who respond according to the companies’ instructions (“premium offers”), can typically require payment in order to participate.  However, promotions that award prizes to consumers by pure chance (“sweepstakes”) cannot require payment of any kind, as whenever a sweepstakes-style contest requires a payment, it risks crossing the line into an illegal lottery.

Any businesses considering implementing these kinds of promotional devices should take the time to understand these distinctions and abide by all disclosure requirements.  If the past is any indication, the FTC and other federal agencies will continue their strict enforcement of these rules.