Thursday, June 17, 2010

Litigating & Resolving Advertising Disputes, part 5

Special Focus Session: Taking the Most Effective Initial Action and Securing Preliminary Relief in a False Advertising Case

John E. Villafranco, Kelley Drye & Warren LLP

Know that a Lanham Act case will be expensive and take up lots of time.

Elaine Divelbliss, Counsel, Litigation, Sprint Prepaid Group

Make sure your marketing people know that they may be sitting down for a deposition in the next few days. Confirm that they are prepared for this when deciding how aggressive the action will be. Another consideration: industry, and how quickly the ads refresh. Prepaid wireless ads refresh every 3 months at the outside. So when you initiate a challenge you necessarily need it to move very quickly.

Villafranco: it’s gotten harder to get a TRO in a §43(a) case; a little easier with a PI, but following eBay and Salinger you have new issues, including an argument that the presumption of irreparable harm may no longer exist. The public interest analysis can’t just be passed over very briefly. The public interest must be considered.

Anticipate the experts you’ll need, the marketing and technical employees, anticipating the 12(b)(6) motion, and preparing for the inevitable counterclaim. In house counsel has to expect a very large bill at the end of that first month. Multiple lawyers and experts are necessary to get a successful PI fast, especially with alleged misleadingness.

Divelbiss: false advertising lawsuits do rally the troops, giving a sense of people working together to fight the good fight. Need to give them the sense of the information you’ll need.

Villafranco: again, counterclaims are important considerations. They’re done tactically and for good reasons—improve settlement position. Finished a case for Perrigo over “compare to” claims; Rexall sued, but it had just lost a NAD case. Proceeded to a jury trial, and jury didn’t buy Rexall’s case in chief but awarded damages on Perrigo’s counterclaims. Assume that your dirty laundry will be aired.

Divelbiss: ask your marketing people to help identify the potential counterclaims; tee up the issue because counterclaims are always met with righteous indignation. You can’t always anticipate but you need to get them thinking about it.

Villafranco: extrinsic evidence—you need to be working with your survey experts from the get-go. Internet surveys have been credited, but there are issues. If there’s a lot of text in the ad, someone might be looking at it on a small screen and the clarity of disclosures will vary by medium. Also an issue with professional survey takers—the theory is that the more frequently people are involved in an internet survey, the more likely it is that they are not representative of the typical consumer. Internet survey is a great way to go to save costs and to get fast results from a very large sample, but the ad has to be appropriate.

Expediting a NAD proceeding—you can declare at the outset you want to do this, and the NAD then needs to agree; the advertiser must also consent. He’s aware of zero cases that do this. More frequently (though still not that often), the challenger submits the challenge, loaded up with evidence with the thought that it might not reply to the advertiser’s brief—the challenger can waive the right to reply. It takes discipline, especially from the lawyers, because the advertiser is going to make its best arguments; the temptation is to reply. If you can do it, shortens the timeframe dramatically (though maybe not as much as we’d like) by taking away the reply and the advertiser’s final response. The advertiser might also be holding certain information/arguments for the final response, anticipating the last word. Electing to waive reply takes that away.

Ideally this would shorten the proceedings a lot—25 days to decision—but in practice the decisions are still 50-60 days out, as opposed to 90 days out with a reply/final response. Worth considering if you really, really feel you’re right.

Remind marketers that discovery is unpleasant—someone will be going through their emails.

Divelbiss: Consider the nature of the advertiser—if you see each other all the time, NAD may be right for you, with ex parte meetings etc. If it’s not a major repeat player, you may want to send a message. If the campaign is so literally false/objectionable, the PI is a statement to make to the competitor.

Villafranco: options aren’t mutually exclusive. He had a case for BellSouth with a company that had a product that would take a dialup and make it faster with caching/compression. Put a big billboard up by BellSouth headquarters and put a sign up saying “as fast as DSL.” Talked about the money, disruption of operations, and decided to go to NAD. Advertiser decided not to comply; then went into federal court and alerted federal and state regulators. Judge credited NAD decision and issued PI right away.

Q: Does a NAD proceeding risk laches in a later case?

Villafranco: No. Judges disagree about the weight or even admissibility of a NAD proceeding, though.

(in response to question on burden of proof) Both agreed that burden of proof isn’t a big issue in selecting a forum; need for speed/how agitated the client is has more significance.

Villafranco: a lot of issues have been decided at the NAD, and a reputable advertiser will be able to look at what “unlimited” or “nationwide” means according to the NAD and conform its behavior—it may not be immediate results, but now you have a guidepost.

Divelbiss: and you have more input in shaping those definitions with NAD than you might in federal court. Press is another consideration—NAD doesn’t impact the public in the way filing for a PI does, which puts the public, regulators, plaintiffs’ lawyers on notice. Egregious claim = federal court route, get others on board, spread the cost and effort. NAD won’t have the far-reaching impact a court case will.

Q: does a PI jeopardize a future damage claim because you’re claiming irreparable damage?

Divelbiss: not entirely. Have to know what to expect from damages—the PI route means that these are new ads, or that your company has done something to reposition itself versus its competitors, and you may not be able to expect much in damages anyway.

Effectively Navigating the Interplay between Government Regulatory Activity and Private Advertising Litigation

Lesley Fair, Senior Attorney, Federal Trade Commission

Standard disclaimer: not opinions of FTC. Most of the cases she’s talking about are settlements, with no admission of liability. Commissioners’ priorities as she sees them: ongoing consumers in crisis—debt settlement, debt collection, mortgage scams. Claim substantiation. Privacy promises. Your company is making privacy claims! If you have a privacy policy, you are making claims you must substantiate just as you need to substantiate a “4 out of 5 doctors” claim.

Showed a TV ad for promising federal loan modification. In past downturns, we haven’t seen ads like this (v. something staplegunned to a telephone pole). This is an ongoing case. Also, $108 million settlement with Countrywide. Bear in mind the FTC’s limited role with respect to mortgages, since other agencies have primary jurisdiction. Dealt with consumers already underwater, in bankruptcy/foreclosure—debt collection practices kicked them when they were down. Chairman Liebowitz said he’d seen frat houses with better recordkeeping.

TV ad for Frosted Mini Wheats—improved attentiveness by nearly 20% (versus no breakfast at all). FTC didn’t think the evidence substantiated that claim. Only ½ showed improvement, and only 1/9 neared that attentiveness level. Exercise care in interpreting results of your studies. You sit in the middle of scientists and marketers.

Likewise, Rice Krispies and claims about enhancing immunity. Procedurally, this wasn’t brought as a separate action, but as an order modification expanding claims covered by the existing order. Concurrence by Liebowitz and Brill: at the same time Kellogg’s was making promises to the FTC about Frosted Mini Wheats, it was preparing to make these dubious claims about Rice Krispies.

Revised endorsement guides: she doesn’t think there’s anything much new. There is one substantive change—the end of the “YMMV disclaimer” as a safe harbor regarding typicality. Advertisers have two choices: substantiate your typicality claims, or clearly and conspicuously—no fine print—disclose the generally expected performance. It’s always been the law that a connection between advertiser and endorser that a connection that a consumer would find relevant to the weight given the endorsement would have to be disclosed. The only difference here is that the FTC used a blogger as an example. There is a lot of misinformation about things like the FTC fining bloggers $11,000. (Comment: See yesterday’s keynote, where Verizon’s GC suggested direct action against bloggers—that’s the type of levelling the playing field that Verizon can apparently get behind!)

Sears settlement: Disclosure of internet monitoring, buried deep in licensing agreement, was insufficient given the nature of the intrusion on consumer privacy.

Predictions: more cases in cooperation with state AGs, as indicated by appointment of Julie Brill as a commissioner. Lifelock: the guy ran his SS number on the side of buses, making what the FTC and 35 states alleged were unsubstantiated claims; resulted in settlement of $11 million for FTC in consumer redress and $1 million for states. Especially likely in area of data security. States have very specific data breach/security laws, and feds can get good remedies; also working with HHS in enforcing HIIPA. Banking credit card litigation is another area.

Interest in creative global settlements. Airborne litigation: confluence of NAD, plaintiffs’ class action ($23 million), FTC settlement (additional $6.5 million into the kitty if it became necessary). When dealing with states—it’s wise to open up a conversation about a global settlement, though it might not be possible.

Continued appreciation for the self-regulatory process. Cases that get referred to the FTC might not result in public law enforcement action, but if you see a referral, check to see a month later to see if they’re still making the same claims. Probably not. Once companies realize the effect of declining to participate in NAD, they often reverse course.

Speed. We’ve gotten a lot faster. The days of “take me to your leader”—stringing staff along because the client/GC wants to go to the bureau chief or the Commission—are gone; that would be really bad strategy. You get a better deal by participating in the investigative process, negotiating with staff. We’re expected to turn things around much more quickly, and your clients will be too.

Darren Bowie, Legal Director, North America, Nokia

State AGs enforce state and some federal laws, e.g., Telemarketing Consumer Fraud and Abuse Prevention Act. Trend: privacy legislation may have state enforcement. Most AGs are elected, which is important to keep in mind.

NAG coordinates multistate actions, with a consumer protection council and public meetings throughout the year. A group of AGs focused on consumer protection also holds 2 public meetings per year.

If a consumer is angry and savvy enough to write to the AG, there might be an issue there. Important to investigate and resolve before the AG starts investigating. Sometimes AG will send an informal letter; sometimes issue subpoena or civil investigative demand. It’s important to know the difference and the rules for responding.

Multistate investigations: typically there’s an executive committee or working group of a smaller number of AGs coordinating the investigation. Important to understand who they are and what there issues are. Is there a state that might take a more reasonable approach? Can ask the AG in your home state to participate.

Outside counsel are key to working on multistate AG actions—know the dynamics/key staff members. Prepare for responding to leaks.

Document production: understand the rules. In particular, confidentiality. Each state has its own rules about what documents are treated as confidential when produce in investigation. Some states would allow FOIA requests. Tactics to minimize risk: obtain assurances from staff that they’ll take steps to enforce confidentiality; one AG office will get the documents and then share; again, experienced counsel is key.

Resolving investigations: you can offer assurances and steps to prevent recurrence, which might be enough to close the investigation. A step up: the letter agreement. Another: assurance of voluntary compliance/discontinuance—voluntary, often not filed in court. States also can do consent decrees.

Unlike the FTC, states typically are empowered to seek costs of investigation and attorney’s fees, and will often want to recover them in any settlement. FTC can seek penalties/restitution, but that doesn’t go to its budget, as opposed to the states. States can also seek restitution. If FTC is involved, try to coordinate an overall relief package.

Recent action: 23 AGs sent letter to AGs determined consumers were posted malicious, unflattering comments directed at children, and asked for changes. Also recently:

Settlement with Valero regarding tobacco by 39 states. NAG will send you an email update on consumer protection cases—he encourages you to sign up—covers multistate as well as individual state actions.

Preemption is another hot topic in Congress, especially on privacy and financial regulatory reform—proposals on privacy are to preempt state standards that go beyond federal rules.

Edward F. Glynn, Venable, LLP

It never rains but it pours: suppose you have an FTC investigation. What else can happen? Cautions that today’s FTC is not the FTC of some years back; don’t try to drag out the process.

Other things that can happen to you: consumer/representative class actions. Lanham Act and NAD are unrelated—the filing of a Lanham Act suit essentially destroys the likelihood of relief from the NAD, which sees itself as alternative and not supplement to Lanham Act. But if you have a NAD action. Where the Lanham Act litigation is about disparagement, it’s not as attractive to a plaintiff’s attorney, but where it’s about false claims about the advertiser’s own product, you may see attractiveness to a class action claim.

The basic steps: what you’d do in any litigation, including preserving documents, starting investigation, and appropriate notice to the insurance carrier. Though the insurance won’t cover gov’t investigation response, if litigation in another forum is triggered, that may well be covered and you don’t want to give the carrier an out in the form of saying they didn’t get notice.

Common counsel/privilege issues—the agency is going to be contacted; need an agreement ideally beforehand but at least when you know the issue is on the horizon. Privilege can be lost if you send a letter you received alleging a legal claim out to the agency without a prior agreement.

Examine the theories: FTC proceeds on falsity theories, but also on substantiation grounds. In many cases, you can’t get damages under state UDAP law without proving falsity, as with the Lanham Act (note that complete lack of substantiation also violates the Lanham Act in the 3d Circuit at least). So keeping the investigation to substantiation reduces the ability of class plaintiffs to free ride on discovery that experienced FTC lawyers have gotten from your client; the class lawyers will want whatever you produced to the FTC and it’s unlikely you can get out of that. To the extent you can limit the FTC to grounds that won’t support a UDAP action, you’re doing well.

FTC and class counsel: typically the FTC case is filed first unless (unlikely) word of the investigation gets out. FTC lawyers are quite circumspect about disclosing information they have before it goes onto the public record, but will meet with class counsel to coordinate timing.

CAFA has made removal a lot easier. Harder to get a class action certified in federal court than in state court. If you beat the rule 23 certification motion in federal court, there’s emergent case law in the 7th circuit that, even though CAFA gives you jurisdiction to pull it up to federal court, if you beat the certification it stays in federal court, which means the class action plaintiff has some difficult choices—try as an individual, or dismiss (often with prejudice if the defendant has answered).

Used to be able to argue that if there was an FTC settlement, with a recovery (even if not 100%), then consumers were virtually represented and that you shouldn’t have to go forward with a state class action. Supreme Court shot that down; the people in the class didn’t have an opportunity to object to the FTC settlement. But Airborne opens a door: the FTC has a two-sided view of class actions. Class actions have a role to play if they’re about more than the plaintiffs’ lawyers. Coupon settlements where only the lawyers get paid, the Commission objects to. In Airborne the FTC added $6 million to the settlement because it was the most efficient way to proceed. In the future, expect more like this.

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