U.S. Federal Trade Commission (FTC)

Amid the hullabaloo over the U.S. Supreme Court’s decision this week in Matal v. Tam, a much broader and potentially more significant development might be overlooked. It shouldn’t be.

The case involved Simon Tam’s band “The Slants,” and as our Elizabeth Patton wrote earlier this week, it invalidated the Lanham Act’s prohibition on the registration of disparaging marks. The crucial development that might be missed, however, is separate from the fascination over whether this decision spells the end of efforts to invalidate the trademark registrations held by the NFL for its football team in Washington, D.C. – it does. Rather, the Slants’ case should be seen for what is lurking in the opinions of the concurring justices. That is, the Tam decision marks a potent evisceration of the First Amendment’s commercial speech doctrine, ensuring heightened constitutional protection for commercial speakers.

U.S. Supreme Court Building, Washington, D.C.
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The commercial speech doctrine has long been invoked to allow broader, more intrusive regulation by government of speech that can be characterized as “commercial.” This is the doctrine that justifies not only the Trademark Office’s regulation of trademarks, but also the Federal Trade Commission’s regulation of social media, and a local municipality’s regulation of highway billboards. The commercial speech doctrine holds that because commercial speech is more robust – that is, because it is financially better equipped to defend itself – the government may have a freer hand in regulating such speech. Under this doctrine, a government regulation of commercial speech has heretofore been subject to a lesser degree of constitutional review – the so-called “intermediate” scrutiny of the Supreme Court’s Central Hudson test.

The Tam case dramatically undermines those prior principles.

Indeed, the various opinions in the Tam case buttress a development in the law that has been building in recent years, where the Supreme Court has been much more skeptical of government attempts to regulate the speech of businesses and other commercial actors. This latest case now solidifies a five-justice majority, and potentially a larger one, that will require rigorous, full-bore, core-speech “strict scrutiny” for government regulations of commercial speech when the regulations attempt to restrict or punish non-misleading commercial speech on the basis of the “viewpoint” expressed in the speech.

In other words, there are at least five justices, and likely more, who no longer focus on whether the speech being regulated is “commercial.” Instead, these justices are willing to apply strict scrutiny – and even a presumption of unconstitutionality – to a regulation that can be characterized as “viewpoint” based.

The nose-counting for this principle looks like this:

In his separate concurrence in Tam, Justice Thomas reiterated his long-held view, one that he persistently expressed along with the late Justice Scalia, that all government regulation of commercial speech should be subjected to strict scrutiny if the speech to be regulated is not misleading. Thus, as First Amendment scholars have long recognized, Justice Thomas already stands in the camp that rejects the rationale of the commercial speech doctrine, that commercial speech is entitled to less protection under the First Amendment.

In addition to Justice Thomas, a four-justice wing led by Justice Kennedy concurred with the outcome in Tam. Kennedy, along with Justices Ginsburg, Sotomayor, and Kagan (that is, the so-called “liberal” wing of the Court) sounded a clarion call for the highest level of constitutional scrutiny on regulations that attack a person’s speech based on the speaker’s viewpoint, regardless of whether the speaker is engaged in commercial speech. Justice Kennedy wrote that “it is a fundamental principle of the First Amendment that the government may not punish or suppress speech based on disapproval of the ideas or perspectives the speech conveys.” He then said that regardless of whether the speech in question is commercial – that is, regardless of the nuances of the commercial speech doctrine – “[a] law found to discriminate based on viewpoint is an egregious form of content discrimination which is presumptively unconstitutional.” (emphasis added)

Thus, there is a five-justice majority, between Kennedy, Thomas, Ginsburg, Sotomayor, and Kagan, that will apply full First Amendment protection against a government regulation that discriminates on the basis of a speaker’s viewpoint, regardless of whether the speaker is commercial or not.

And finally, there is reason to anticipate sympathy for this view even among the rest of the justices. The portion of Justice Alito’s principal opinion that reflected only a four-justice plurality of himself, and Chief Justice Roberts and Justices Thomas and Breyer, observed that the Supreme Court has said “time and again” that the public expression of ideas “may not be prohibited merely because the ideas are themselves offensive to some of their hearers.”

These pronouncements line up to be an eight-justice majority, and potentially a unanimous Court once Justice Gorsuch’s views become known (he did not participate in the Tam case). The Court has thus made clear that the government is barred from regulating truthful, non-misleading commercial speech where the only justification for the regulation is that the commercial speech offends the sensibilities of the listeners.

This expansion of the strict-scrutiny regime into territory once thought to be an area of more fulsome government regulation puts into play all kinds of statutory regimes. Clearly, in addition to the anti-disparagement provision of the Lanham Act, that statute’s additional prohibitions against the registration of trademarks that are “scandalous” or “immoral” soon will be invalidated. (Indeed, the Trademark Office has already signaled its recognition of the likely invalidity of these provisions in briefing it submitted to the Federal Circuit last year.) As a reuslt, trademark applicants who previously were unable to obtain registrations of marks with profanity in them or marks with sexual innuendoes now likely will be able to obtain such registrations.

Similarly, the FTC’s regulatory guidance that has required media companies to disclose whether content on their websites are “sponsored” is potentially subject to strict scrutiny because these restrictions are a regulation of commercial speech based on the viewpoint of the speaker.

Other statutory regimes are equally at risk under this now more robust protection of commercial speech. Hence, states that have enacted “veggie libel” laws that prohibit advertising that criticizes a state’s agricultural products are now likely to face a presumption of unconstitutionality and a need to justify the laws under a strict scrutiny regime.

In addition, states that have enforced restrictions on companies’ truthful, non-misleading advertising will face more legal challenges. One prime example will be the states where marijuana has been legalized but the states have also restricted how those cannabis businesses may advertise their products. Those regulations discriminate against the cannabis business’ advertising based on their viewpoint. The Tam decision means that those regulations are presumptively unconstitutional.

Similarly, municipalities that have prohibited or restricted the advertising of ride-sharing or room-sharing businesses also will find it much more difficult to defend such commercial speech regulations because they enjoin speech on the basis of the speakers’ viewpoints.

The fundamental sea change that can be seen in the Tam decision is that non-misleading, truthful commercial speech is no longer the benighted stepchild of the First Amendment. Rather, such speech now is entitled to the strongest form of constitutional protection when the government seeks to regulate such speech because of the speaker’s viewpoint – that is, when the speech is targeted “based on the government’s disapproval of the speaker’s choice of message.”

The practical effect of the Tam case, when read together with the earlier line of decisions applying the highest form of First Amendment protection against viewpoint discrimination, is that businesses now have an even stronger First Amendment basis to resist government efforts to control the way they speak to the public and their customers when their speech is not misleading.

Retailers often use product reviews to supplement advertising and drive sales.  Such use has become more prevalent as sales shift from brick and mortar stores to internet sales, where splattering a webpage with purported product reviews is easy, cheap, and grabs eyeballs.

Online product reviews
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Many major online retailers offer product reviews submitted by consumers. Many online retailers will provide product reviews on their website that the company has solicited or otherwise selected for favorability. Such reviews are supposed to be authentic and accurate. While the retailer can select which reviews are displayed, the reviews should be real and the consumer can decide how much weight to give a review.  However, purported third party website reviews exist for the specific reason that they are supposed to be independent and will give the good and the bad. Several companies and individuals recently discovered that faking a third party review website will result in action from the FTC.

The website of Trampoline Safety of America purported to use experts to give safety ratings to different trampoline brands, rating those made by Infinity and Olympus Pro the highest.  However, what was not disclosed to consumers according to the FTC was that Trampoline Safety of America was operated by Infinity and Olympus Pro and the company owners.  According to the FTC the comments and videos on the website were also not authentic customer reviews, but were created by the owners of Infinity and Olympus Pro.  Following FTC action, the parties are heading toward settlement.

While such conduct is obviously improper, it is important always to disclose conflicts regarding product reviews and to only use consumer reviews or testimonials that are actually given by customers.  All factual claims, especially medical related claims, must be supported by actual data or testing.  Not only has the FTC shown a willingness to crack down on companies that violate such requirements, consumer protection lawyers and competitor companies can also be expected to bring claims and seek damages.

The Federal Trade Commission (“FTC”) recently filed a Complaint in the Southern District of California against six entities and four individuals, accusing them of deceiving customers with their use of “free” and “risk-free” trial period advertising related to cooking products, golf-related products, and online subscription services on their websites, in TV infomercials, and via email.

risk-free trial offer
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The FTC’s Complaint alleges that the defendants violated section 5(a) of the FTC Act, which prohibits unfair or deceptive acts, by misrepresenting the trial offers applicable to their products.  Specifically, the FTC accuses the defendants of advertising their products as having a “risk-free” trial period when, in reality, the consumers are required to return the product at their expense before the trial period ends in order to avoid being charged additional amounts for the product.  The FTC also accuses the defendants of failing to adequately disclose the material terms and conditions of the trial offer, of their continuity/subscription plan offers, and of their refund and cancellation policy.  For example, the FTC takes issue with the defendants’ failure to clearly disclose that they would start charging the consumer if he/she did not cancel the trial period or return the product.

In addition to violations of the FTC Act, the FTC’s Complaint also alleges violations of the Restore Online Shoppers’ Confidence Act (“ROSCA”).  The FTC describes ROSCA as an act that “prohibits any post-transaction third party seller (a seller who markets goods or services online through an initial merchant after a consumer has initiated a transaction with that merchant) from charging any financial account in an Internet transaction unless it has disclosed clearly all material terms of the transaction and obtained the consumer’s express informed consent to the charge.”  The FTC’s Complaint against the defendants focuses on section 4 of ROSCA, which prohibits the sale of products through an improper “negative option” feature.  A “negative option” feature is a provision in an offer to sell goods or services under which the consumer’s silence is taken as an acceptance of the offer.  It is improper to utilize a “negative option” feature unless the seller satisfies the following requirements: (1) clearly and conspicuously disclose all material terms of the transaction before obtaining the consumer’s billing information, (2) obtain the consumer’s express written consent before charging the consumer, and (3) provide a simple mechanism for the consumer to stop recurring charges.  The FTC’s Complaint alleges that, in violation of section 4 of ROSCA, the defendants did not meet any of those three requirements with respect to their cooking and golf-related goods and services.

The FTC seeks an injunction preventing future violations of the FTC Act and ROSCA as well as other relief necessary to redress injury to consumers.  It is clear that the FTC looks closely at advertisements claiming to offer “free” and “risk-free” trial periods and that companies should make sure to adhere to the FTC’s and ROSCA’s requirements.

 

Made in the USA Banner
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In the last two months, the Federal Trade Commission (“FTC”) has reached two settlements related to complaints it initiated against companies regarding “Made in the USA” advertising claims.

First, in February, the FTC announced that it had reached a settlement with a Georgia-based water filtration systems company named iSpring Water Systems, LLC.  According to the FTC, iSpring advertised its water filtration systems on its website and through third parties as “Built in USA” (and other similar claims).  The FTC found such advertising false or misleading because the water filtration systems were either entirely imported or contained significant parts that had been imported, thus violating the FTC’s long-standing requirement that “all or virtually all” of the product be made in the USA in order to be advertised as such.  The settlement allows iSpring to make certain qualified claims, with a clear and conspicuous disclosure, but prohibits iSpring from advertising contrary to the FTC’s “all or virtually all” requirement.  More information regarding the settlement is available on the FTC’s blog.

Second, earlier this month, the FTC announced that it had reached a settlement with a Texas-based pulley company named Block Division, Inc.  According to the FTC, Block Division advertised its pulleys in various media using “Made in USA” text and graphics.  The FTC found such advertising misleading given that the pulleys had significant and essential parts that had been imported.  Further, some of the pulleys contained steel plates stamped as “Made in USA” before they were imported.  The settlement allows Block Division to make certain qualified claims, again with a clear and conspicuous disclosure, but prohibits Block Division from advertising contrary to the FTC’s “all or virtually all” requirement.  More information regarding the settlement is available on the FTC’s blog.

Both of these FTC actions and resulting settlements demonstrate that the FTC takes “Made in the USA” claims seriously and will enforce its requirements regarding such advertising.  A prior blog post outlines those requirements in more detail.

In April 2016, the FTC filed a Complaint against Dr. Joseph Mercola and his companies alleging that their indoor tanning system advertisements violated section 5(a) of the FTC Act, which prohibits unfair or deceptive practices in commerce, and section 12(a) of the FTC Act, which prohibits the dissemination of false advertisements in commerce for the purpose of inducing the purchase of foods, drugs, devices, services, or cosmetics.  According to the FTC, indoor tanning systems qualify as “devices” under the FTC Act.

tanning bed
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In its Complaint, the FTC alleged that the defendants disseminated a number of false, misleading, deceptive, and unsubstantiated advertisements on the Mercola.com website, in search engine advertising, in a YouTube video of Dr. Mercola himself, and via newsletters.  Such advertisements include:

  • Tanning with Mercola brand indoor tanning systems is safe;
  • Tanning with Mercola brand indoor tanning systems will not increase the risk of skin cancer as long as consumers top using the system when their skin is only the slightest shade of pink and not burned;
  • Tanning with Mercola brand indoor tanning systems does not increase the risk of skin cancer, including melanoma skin cancer;
  • Tanning with Mercola brand indoor tanning systems reduces the risk of skin cancer;
  • The FDA has endorsed the use of indoor tanning systems as safe;
  • Research proves that indoor tanning systems do not increase the risk of melanoma skin cancer;
  • Certain Mercola brand tanning systems will pull collagen back to the surface of the skin, increase elastin and other enzymes that support the skin, fill in lines and wrinkles, and reverse the appearance of aging;
  • Tanning with Mercola brand tanning systems provides various benefits to consumers, including increasing Vitamin D and providing Vitamin D-related health benefits; and
  • The Vitamin D Council recommends Mercola brand tanning systems (without disclosing that the defendants arranged for the Vitamin D Council to be compensated for its endorsement).

Today, the FTC announced that, as a result of a settlement agreement reached with Dr. Mercola and its companies, the FTC is mailing $2.59 million in refunds to more than 1,300 purchasers of Mercola indoor tanning systems. According to the FTC, the average refund check is $1,897.  Additionally, under the settlement agreement, the defendants are banned from selling indoor tanning systems in the future.

More information regarding the FTC’s views on indoor tanning advertising can be found on the FTC’s website and blog.  According to the FTC, no government agency recommends indoor tanning and the FDA requires indoor tanning equipment to contain signs warning users of the risk of cancer.  In addition, the FTC actively investigates false, misleading, and deceptive advertisements related to indoor tanning.

Sunscreen
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Earlier this month, the Federal Trade Commission (“FTC”) issued a decision against California Naturel, Inc. related to its advertising of “all natural” sunscreen on both its website and the product packaging itself. On its website, California Naturel was not only advertising its sunscreen as “all natural” but was describing the sunscreen as containing “only the purest, most luxurious and effective ingredients found in nature.” The FTC found that this advertising conveyed that California Naturel’s sunscreen contains only ingredients that are found in nature.  But because California Naturel admitted that eight percent of its sunscreen formula consists of a synthetic ingredient, the FTC determined that California Naturel’s advertising constituted false and misleading advertising and that such advertising is likely to materially impact consumers’ purchasing decisions.

In response to California Naturel’s arguments, the FTC decided that the product’s ingredient list and the disclaimer on California Naturel’s website were insufficient to cure the deceptive advertising. With respect to the ingredient list, the FTC noted that the synthetic ingredient was buried within a list of over 30 ingredients and that nothing identified the ingredient at issue as synthetic. With respect to the website disclaimer, the FTC found that it was not prevalent enough given its location at the bottom of the website—particularly in contrast to the prevalence of the “all natural” advertising elsewhere on the website and on the product packaging itself.

Under its authority to issue a remedy for false and misleading advertising, the FTC issued an order prohibiting California Naturel from advertising its products as “all natural” or making other similar representations. More information about the FTC’s decision against California Naturel can be found here.

One likely result is that companies will get sued by its competitors. Such a lawsuit will cost money to defend, cause a distraction to the company, and has the potential to embarrass the company with consumers.

Another potential result is more troubling – an enforcement action by the FTC. Such actions, like competitor lawsuits, are expensive to defend, cause distraction, and have the added problem of communicating to consumers that the government thinks the company is making false statements.

A recent FTC enforcement action decision reinforces the necessity for companies to validate the advertising claims made about their products, particularly if such claims relate to health benefits.

In May 2015, the FTC filed a lawsuit against COORGA Nutraceuticals Corporation and its owner claiming that the Defendants violated the law in claiming that their “Grey Defense” dietary supplements reversed or prevented gray hair. The United States District Court for the District of Wyoming recently granted summary judgment in favor of the FTC, issued an injunction against the company and its owner, and asked the Defendants to pay nearly $400,000.

COORGA marketed Grey Defense to consumers as not only a product that could stop, reverse and prevent the natural graying of hair, but also that it was scientifically proven to do so. The Court found that the COORGA did not have the required scientific evidence to support such claims.  In addition to finding that the company was liable, the Court also found the owner liable because he controlled COORGA’s advertising.  The Court took COORGA’s owner to task for “arrogantly” relying on internet research to validate the company’s claims.  The Court found that this conduct constituted “reckless indifference” and issued an injunction against the company relating to advertising claims across a broad range of products in addition to finding Defendants liable for $391,335.

As this and other FTC enforcement cases make clear, a company must ensure that if it makes scientific claims about its products that it has the testing to back up those claims.

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.

Companies that advertise their products as “Made in the USA” should be aware of the Federal Trade Commission’s (“FTC”) stance regarding such advertisements.  The FTC regulates both express claims (e.g. advertising with the phrase “Made in the USA”) and implied claims (e.g. advertising with the phrase “true American quality” or with a U.S. flag symbol).  Before a company decides to advertise in this manner, the FTC requires that the company have a reasonable basis to substantiate the claim at the time it is made.

Made in the USA Banner
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So what is a “reasonable basis” for this type of claim?  The FTC itself provides guidance to companies interested in advertising their products as “Made in the USA” in a lengthy Federal Registration Notice: 62 Fed. Reg. 63756.  But even with this guidance, the issue is not black and white.  The FTC explains that a product must be “wholly domestic” or be “all or virtually all” made in the United States in order for a “Made in USA” claim to be substantiated.  But “all or virtually all”—defined by the FTC as meaning that all significant parts and processing that go into the product are of United States origin (i.e. there is only a de minimus amount of foreign content)—may be a difficult standard to apply in some circumstances.

The FTC finds a number of factors relevant to the issue—such as whether final assembly/processing occurs in the United States, the portion of total manufacturing costs attributable to parts and processing in the United States, and how far removed any foreign content is from the finished product.  See 62 Fed. Reg. 63756 at 63765.  In general, the more that occurs in the United States, the better the claim that the product is “Made in the USA.”  In an attempt to provide clarity regarding the “all or virtually all” standard, the FTC’s staff has issued a separate publication meant to convey additional guidance.

Further complicating the issue though, certain states may also have specific prohibitions related to advertising products as “Made in the USA.”  For example, Cal. Bus. & Prof. Code § 17533.7 makes it unlawful to mark products with that or similar phrases if the product, or any part of the product, is “entirely or substantially” made outside of the United States (though there are a couple exceptions).

Advertising products as “Made in the USA” can be tricky.  Before advertising, make sure to consult an attorney to ensure compliance with the FTC’s guidance as well as any state-specific requirements.