Wednesday, March 26, 2008

ABA Antitrust section: consumer protection roundup

ABA Antitrust Section Spring Meeting

Falsity Fallout: The Evolution of the Falsity Standard in Recent Advertising Cases

Session Chair and Moderator:

Christie L. Grymes, Kelly Drye Collier Shannon, Washington, DC

Lesley Fair, Senior Attorney, Federal Trade Commission, Washington, DC

On the FTC’s radar: (1) Health claims. The Q-Ray case involved 7 studies allegedly substantiating the health claims, but the FTC staff rebutted them all. An important issue: a product that works just because of the placebo effect can’t make a health claim. Judge Easterbrook was concerned that products that “work” because of the placebo effect would deter people from using treatments that actually work and also have a placebo effect. Easterbrook characterized Q-Ray’s alleged substantiation as “bunk” in the opinion.

Easterbrook said testimonials aren’t substantiation – they can’t prove cause and effect. This bolsters the FTC’s position that testimonials aren’t substantiation, but rather create the need for substantiation. The type of claim controls what type of substantiation is required: when you make health claims, you are likely to need double-blind placebo-controlled studies. This isn’t a heightened standard but an ordinary application of substantiation rules.

Childhood obesity and green claims are other FTC concerns.

(2) Promotional practices: do-not-call is here to stay. Recent settlements with Craftmatic, ADT, and Ameriquest resulted in a total of $7.7 million in civil penalties, involving things like using a sweepstakes form to request phone numbers and treating that as permission to engage in telemarketing. One of the cases involves a corporate VP individually: advertisers, take note.

Budget: alleged that Budget falsely claimed that those who returned cars with full tanks wouldn’t pay a fee, but those who drove short distances were charged for doing so. And when people complained, they were told they’d have to go back inside, which most people returning cars didn’t want to do. Company’s defense: additional fee was disclosed elsewhere; the FTC didn’t think that was good enough, both because it was confusing and because the “no charge” ad operated as a bait and switch.

Blue Hippo: For consumers with bad credit, promised a computer after making 13 automatic payments. But if in that time, consumers changed their minds for any reason, they couldn’t get their money back – FTC alleged that failing to disclose this clearly and conspicuously was a deceptive practice. Result: $3.5-5 million in consumer redress.

Rebates: FTC had a workshop on the subject. Soyo: ads said rebate checks would come in 10-12 weeks, but the 90-95% of consumers didn’t get their money within that time. InPhonic: consumers who turned in their rebate materials “too early” – company set up the rebate so that consumers had to wait 3-6 months to file. The effect on “breakage” as the industry calls it was profound. If they sent in claims before that, their rebates were denied. The FTC alleged unfairness.

Internet-based lead generators: ValueClick/Adaractive – little messages on websites saying “you’ve won X.” The FTC alleged that getting the free product required navigating a ziggurat of layers – starting with a requirement that consumers buy a small-ticket item, luring them in. But to get to the top, consumers had to buy an expensive satellite TV subscription or finance a car. There were significant civil penalties. The “Sound of Music” principle: When you promise something for free, you can’t require consumers to “climb every mountain, ford every stream, chase every rainbow” before they claim their prizes.

(3) Information security. ValueClick’s privacy policy promised certain levels of encryption and safety measures, yet its sites were vulnerable to a SQL injection attack. The FTC did not allege that this had lead to a breach. The FTC standard is reasonableness: it was unreasonable to fail to protect consumers from this foreseeable problem. Another case: American United mortgage papers were found in a dumpster; this violated rules that confidential consumer information should be securely destroyed, not dumped. The “Life is Good” website suffered a breach and names and credit card numbers due to a SQL injection attack, and the FTC alleged a violation. offers a toolkit of materials for consumers. For law firms: you’re free to take FTC guides and disseminate them with the FTC’s name on them or with your own. (No attribution rights here!)

(4) Cautionary tale: Enzyte, the male enhancement product. FTC brought a case alleging that consumers were offered “free samples” that turned into automatic shipments and credit card charges, making it hard for consumers to cancel. Company officials were later criminally indicted and convicted. One defendant was convicted of conspiracy to obstruct FTC proceedings. There was a multimillion-dollar forfeiture.

Julie S. Brill, Assistant Attorney General, Vermont Attorney General’s Office

Montpelier, VT

The AGs have been active over the past year.

Subprime mortgages, of course. Many settlements for falsity in advertising and marketing from institutions like Ameriquest, but now there’s devolution from the big players to focus on the smaller players who’ve caused the biggest problems. Fifty-plus investigations pending into lenders and brokers, including Countrywide. Settlements define what mortgage terms are presumptively unfair. Scams from “mortgage rescue” operators are also a great concern; people in desperate circumstances are duped into signing over title to their houses. Other areas: statements by people in the secondary market; appraisers’ practices.

Initiatives: Iowa’s foreclosure rescue hotline; State Foreclosure Prevention Working Group. The problem is, as we’ve seen, getting the servicers actually in touch with homeowners. Once that happens, half can work out a solution.

The AGs have found that most problems in subprime occur before a rate reset, which means that the loans were inappropriate, teaser rates aside.

Health care. Oxycontin: 26 states plus DC settled with Perdue Pharma for $19.5 million over allegations of off-label marketing and failed to disclose abuse and diversion risks. Guidant defibrillator: 35 states plus DC settled for $16.75 million over a redesign, when they continued to sell 4000 defective devices while knowing they were subject to shorts. Guidant agreed to do more disclosure and add $1 million to its warranty program. Pharmaceutical benefit managers: grease the wheels between pharmacos and employers by purchasing large volumes and negotiating rebates; they engage in aggressive “switch” programs to save money. Settlement with Caremark: 28 states plus DC, $38.5 payment to the states, plus reimbursement to consumers for costs they may have occurred in switching statins.

Product safety, especially lead. California recently sued a large number of major toy manufacturers, alleging that they knowingly exposed consumers to unlawful quantities of lead and failed to disclose the risks. Alcohol drinks: “Cocaine,” advertised as “speed in a can.” Illinois and Connecticut AGs ordered it removed from shelves in May 2007, while Texas obtained a preliminary injunction against it.

Insurance and securities: As baby boomers age, annuities will be a bigger issue in consumer protection. Settlement between Aetna and NY: Aetna developed a doctor ranking system that they represented was based on quality, but really it was based on cost to the insurer.

Privacy and Information Security: The states followed FTC action on Choicepoint, and there are lots of state privacy laws. The AGs have been very concerned about social networking sites, especially age verification. E.g., requiring MySpace to rapidly move into age and identity verification, and getting MySpace and Facebook to focus on complaints about inappropriate conduct and contacts. 49 states also reached agreement with AOL about how it dealt with people who sought to cancel service.

August T. Horvath, Heller Ehrman LLP, New York, NY

Highlights in competitor and consumer lawsuits:

Axcan v. Ethex: Claims of drug equivalence—FDA rules didn’t preempt the lawsuit because the definition of equivalent can be derived without reliance on the FDA; Horvath is a bit bothered by the result because there was no evidence of what the relevant consumers understood “equivalent” to mean.

Brooks v. Topps Co.: Claims that a story about a baseball player’s nickname was false weren’t actionable.

CKE v. Jack in the Box: defendant’s TV ads contrasted their sirloin hamburgers to “Angus” burgers, where the ad suggested that the sirloin area of a cow is better than the “angus” area of a cow, relying on the play with “anus.” The district court found this wasn’t false, rejecting a consumer survey. Other restaurants advertise “Angus” beef but don’t explain why that’s a good thing, and Horvath thought the ads were a funny way of showing the meaninglessness of the “Angus” label.

Morton Grove v. National Pediculosis Ass’n: a nonprofit sued over an allegedly competing lice comb. Defendant claimed that it wasn’t a commercial competitor, but the court agreed that it sold a competing product, even if the sales went to fund nonprofit activities.

The seduction industry: men who teach other men how to meet and seduce women. Parker v. Learn the Skills Corp., 2008 WL 108674 (D. Del.), alleging that one such teacher set up a hate site about the other. The judge found the statements not false but opinion, and to be about the competitor rather than the competitor’s services. Because the statements were “juvenile,” there was no Lanham Act claim, though Horvath considers this a bit of a non sequitur.

Proctor & Gamble v. Ultreo: disclosure of substantiating surveys.

Russian Standard Vodka v. Allied Domecq: A love letter to the NAD.

DirecTV case: Horvath called attention to the court of appeals’ finding that the website comparison was puffery because the cable picture was so obviously fuzzy. He pointed out that, given that everyone accepted that digital cable and satellite HD are equivalent, it’s not clear why this isn’t an exaggeration of a false claim and thus still false.

Cert. was just denied in the Phoenix of Broward case. Petitioner had argued (correctly) that Conte Bros. is only supposed to increase the scope of Lanham Act standing, not shrink it when applied to actual competitors.

Barbara’s Sales, Inc. v. Intel: Changing from Pentium 3 to Pentium 4 is not inherently a statement of improvement, and even if it were, that would be too vague to be actionable.

Druyan v. Jagger (SDNY): a lawsuit against Mick Jagger & others because Jagger cancelled a concert when he got ill, even though the concert promoter offered a ticket for another performance. The disclaimers on the concert ticket were adequate: dates and times may change without warning; the concert might not take place as scheduled. The plaintiff had no recourse for her incidental and consequential damages. You can’t always get what you want.

Lawsuits against Coca-Cola over Enviga have foundered on failure to allege ascertainable loss.

Pervasiveness of conduct: L.A. Limousine v. Liberty Mutual Ins. Co. (D. Conn. 2007): screwing up one insurance claim doesn’t violate consumer protection law; you need to allege a course of conduct. Another NJ case involved a seller who sold the same car to many different people—Slavick v. McKinney (N.J. Super. A.D. 2007)—the trial court found that defendant wasn’t in the “business” of selling cars, but just sold this one car many times. The court of appeals reversed because he’d sold other cars before.

McKinnis v. Kellogg USA (C.D. Cal. 2007): based on a couple who wanted to buy healthy products for their kids, and argued that Froot Loops was deceptive because it contains no fruit. They lost because the ingredients are on the box, and “Froot” is not fruit. The same people sued over Trix, Fruity Cheerios, GoGurt, and Kix. The same result: you’re allowed under the FDCA to describe the “flavor profile” – what it’s supposed to taste like.

A word on expert witnesses: MySpace sued a spammer who registered 11,000 profiles; defendant proferred a witness to testify on consumer perceptions and social networking sites, but the witness was an aerospace engineer. The court gave his testimony no weight. MySpace v. Wallace, 498 F. Supp. 2d 1293 (C.D. Cal. 2007).

Parker v. Howmedica, 2008 WL 141628 (D.N.J.): NJCFA claim over a squeaky artificial hip. Emotional distress isn’t an available source of damages; if you just lived with the squeak, you have no remedy.

When you can sue medical practitioners: Michael v. Mosquery-Lacy: a woman who had peridontal work done sued because she repeatedly asked her provider not to use animal bone, only human bone, in her jaw reconstruction, but the provider used cow bone instead. The court allowed the case to proceed, but said she’d have to show damage to property at trial, not just distress over the presence of cow bone. Usually medical practice is off limits, but here the representations are at issue, as distinct from medical practice. Contrastingly, a Conn. case, Rosenberg v. Langdon, refused to allow a malpractice-type claim to be recast as consumer protection when the plaintiff suffered burns.

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