Strategic Perspective

Top ten advertising and consumer protection cases of 2016 and what may come in 2017

By Jody Coultas, J.D.

Although 2016 is not yet over, it will most likely be known in advertising and consumer protection law circles for the bombshell allegations that Volkswagen deceptively represented the environmental benefits of its "clean diesel" vehicles. This was also the year of the "clear and conspicuous" disclosure, with huge settlements stemming from purported failures to adequately disclose the use of paid influencers and native advertising. The flow of labeling cases also continued this year with plaintiff’s attorneys and class actions making clear that consumers are very concerned about what goes into their food and where their goods are made. In addition, a trend that began a few years ago, but really accelerated this year, is the deceptive pricing lawsuits filed against retailers.

1. Record-breaking Volkswagen "clean diesel" settlement

This year, the FTC announced a record-breaking false advertising settlement to the tune of $10 billion. The FTC alleged that Volkswagen misrepresented that certain Audi and Volkswagen vehicles were environmentally friendly, had low emissions, complied with state and federal emissions standards, and retained high resale values. The settlement order provides that, in most cases, the owners of Volkswagen and Audi diesel cars fitted with illegal emissions-defeat devices will receive between $12,500 and $44,000. The amount each owner receives will depend on the model, year, mileage, and trim of the car, as well as where the owner lives. The settlement also resolves claims brought by the Department of Justice and the State of California, bringing the settlement package to $14.7 billion.

With two Commission seats open on the FTC and current chair Democrat Edith Ramirez being replaced with a Republican, the incoming Trump administration will likely have a sizable impact on the focus of the Commission. The campaign provided little insight into the direction the FTC might take under the next administration, but it is likely that a deception of this magnitude will be met with similar resources and result in a similar penalty.

2. Rejected offer of judgment does not moot TCPA claims

The U.S. Supreme Court held that an unaccepted settlement offer or offer of judgment does not moot a plaintiff’s case in a Telephone Consumer Protection Act (TCPA) case. The decision is of great interest to class action attorneys because it questions a plaintiff’s ability to represent a putative class after being offered a settlement of complete relief. The six-to-three decision affirmed the U.S. Court of Appeals in San Francisco ruling that a company could be vicariously liable under the TCPA by allowing a third-party vendor to send unsolicited text messages (Campbell-Ewald Co. v Gomez, January 20, 2016, Ginsburg, R.).

The decision overturned case law holding that an offer of judgment for complete relief under Rule 68 mooted a consumer’s claims, even if rejected. Prior to the decision, a full offer was thought of as a defense available to companies facing potentially massive litigation costs in cases in which theoretical statutory damages are astronomical.

Importantly, the court did not reach the question of whether a defendant moots a claim by making an actual payment of full relief, and provided suggestions on the options for paying the complete relief required to moot a claim, such as by depositing funds in the plaintiff’s bank account or depositing funds with the district court. While plaintiffs may be more likely to reject early settlement offers based on this decision, the court left intact Rule 68’s provision that a plaintiff must pay the costs incurred after the offer was made if the ultimate judgment is not more favorable than the unaccepted offer. Also, lower courts have noted that rejection of an offer may result in greater scrutiny of the class representative.

3. FTC files first native advertising case

With the rise of social media and digital advertising, there has been a corresponding blurring of editorial content and paid advertising. This blurring led the FTC to file a complaint against Lord & Taylor, LLC, the FTC’s first-ever native advertising case. Lord & Taylor is prohibited from misrepresenting that commercial advertising is from an independent or objective source and that any paid endorser is an independent or ordinary consumer (In In the Matter of Lord & Taylor, LLC, FTC File No. 152 3181).

An industry study, which found little compliance with the FTC’s guides on endorsements and native advertising, suggests that this topic will remain on the agency’s radar in the years to come. Yet, native advertising cases are not just within the purview of the FTC. Suits have popped up across the country. According to the federal district court in Trenton, New Jersey, native advertising provider Congoo, LLC stated Lanham Act claims against competitor Revcontent LLC based on allegedly false and misleading native advertising (Congoo, LLC v. Revcontent LLC, April 15, 2016, Shipp, M.).

4. Mobile ad company settles charges that it deceptively tracked consumers’ locations

A Singapore-based mobile advertising company settled FTC charges that it deceptively tracked the locations of hundreds of millions of consumers, including children, without their knowledge or consent in order to serve them geo-targeted advertising. Pursuant to the proposed settlement order, InMobi would be prohibited from collecting consumers’ location information without their affirmative express consent, and required to honor consumers’ location privacy settings and delete the location information of consumers it collected without their consent. InMobi was also subject to a $4 million civil penalty, which will be suspended upon payment of $950,000 (U.S. v. InMobi Pte Ltd., FTC File No. 152 3203).

5. FTC continues to crack down on nondisclosure of paid influencers

The FTC also focused on paid online influencers that apparently did not learn from the game-changing settlement with Machinima, Inc., in 2015. As part of its advertising campaign for the video game "Shadow of Mordor," Warner Bros. Home Entertainment, Inc., hired online influencers to post gameplay videos on YouTube and to promote the videos on Twitter and Facebook. Warner Bros. allegedly did not require the influencers to disclose the fact that they had been paid to promote the video game. To resolve the suit, a consent order prohibits Warner Bros. from misrepresenting that any sponsored gameplay videos are independent opinions or the experiences of impartial video game enthusiasts. There must be a clear and conspicuous disclosure of any material connection between a company and any influencer or endorser promoting its products. Warner Bros. must ensure that future campaigns comply with the terms of the order (In the Matter of Warner Bros. Home Entertainment, Inc., FTC File No. 152 3034).

This settlement, along with agency guidance, makes clear that the FTC is serious about enforcing the clear and conspicuous disclosure requirements contained in the FTC Endorsement Guides and Section 5 of the FTC Act in the area of paid online influencers. Hashtags like #ad, #spon, #sp, #sponsored may be insufficient in some circumstances, and advertisers are responsible for the content of sponsored posts.

6. Rise in digital platforms requires rise in data security focus

This year, the Commission held that now defunct LabMD’s data security practices violated the FTC Act. The decision, which has been criticized by some as overreaching, concluded that lapses in data security may be unfair if the potential harm is high, even when the likelihood of the injury is low, and that subjective types of harm might be considered as a basis for finding a violation of Section 5 of the FTC Act (In the Matter of LabMD, Inc., July 28, 2016, Ramirez, E.).

With this decision, the FTC made clear that it takes a broad view of its authority to file suit against companies that it feels have insufficient data security practices even when there is no evidence that consumers were injured by company's practices. In light of various studies showing that many companies are not taking the necessary steps to ensure personal information, especially in the area of wearable technology, the FTC’s view of its authority in this area could have a significant impact on the industry. However, the shift back to a Republican majority on the FTC could lead to a scaling back on privacy and data protection actions.

7. FTC clarifies standards for "Made in USA" claims

A Georgia-based specialty chemical company agreed to pay a $220,000 judgment and refrain from making misleading unqualified claims that its glues are made in the United States under the terms of the stipulated final order settling an FTC complaint that the "Made in the USA" labeling was deceptive (FTC v. Chemence, Inc., Dkt. No. 1:16-cv-228, FTC File No. 152-3261).

Two suits brought by consumers this year did not fare as well, however. A class action brought in California court alleging that Sears Roebuck & Co. falsely advertised its line of Craftsman tools and products as made in the United States was denied certification because the proposed class was overbroad, lacked commonality, and was not ascertainable. An Illinois consumer’s claims that Wal-Mart falsely advertised certain products as American-made was dismissed based on prior knowledge that Wal-Mart mislabeled products as "Made in the USA."

8. Prescription drug ads not subject to Lanham Act

Drug manufacturer Apotex, Inc. failed to state Lanham Act claims against competitor Acorda Therapeutics, Inc. for misrepresenting its pharmaceutical products, according to the U.S. Court of Appeals in New York, because a pharmaceutical company’s advertisements cannot form the basis for Lanham Act false advertising claims to the extent they were in line with an FDA-approved label. Apotex unsuccessfully challenged statements by Acorda sales representatives that patients taking Zanaflex capsules with food enjoy dosing flexibility and diminished drowsiness (Apotex Inc. v. Acorda Therapeutics, Inc., May 16, 2016, per curiam).

9. Consumers challenge retailers’ discount pricing claims with mixed results

Consumers across the country have filed individual and class action suits against various retailers, including those with outlets, based on deceptive sale pricing. While some courts found that the consumers had standing and submitted sufficient evidence to proceed with the claims, other courts dismissed the claims for failure to show a cognizable injury. It remains to be seen whether consumers will actually win in court, these types of suits are on the rise and now include online retailers as well as brick-and-mortar stores.

The federal district court in St. Paul, Minnesota, found that a Best Buy customer failed to plead with particularity that Best Buy Co., Inc. induced him to purchase a microwave by misrepresenting the microwave’s "regular" price so that he believed he was purchasing it a discounted price (Nunez v. Best Buy Co., Inc., June 7, 2016, Frank, D.).

TJ Maxx, Marshalls, and HomeGoods could face liability in California for allegedly deceptive use of "Compare At" and MSRP price information on the price tags of products they sold in the state, the federal district court in Los Angeles has held (Chester v. The TJX Companies, Inc., August 18, 2016, Wright, O.).

An individual consumer could proceed with an Ohio Consumer Sales Practices Act (OCSPA) claim against a website operator that allegedly advertised a non-existent price advantage, but he could not pursue that claim in a class action lawsuit for failure to show damages, the federal district court in Cleveland has ruled (Gerboc v. ContextLogic, Inc., November 4, 2016, Nugent, D.).

A California resident was entitled to bring California, Wisconsin, and multi-state class action unfair trade practice claims against Kohl’s Department Stores based on allegations that its "marked-down" pricing scheme was deceptive, the federal district court in Milwaukee ruled (Le v. Kohl’s Department Stores, Inc., February 8, 2016, Stadtmueller, J.). However, a federal district court in Boston ruled that a consumer who was allegedly misled into purchasing merchandise at Kohl’s by unfair and deceptive price tags could not maintain a deceptive practice action because she did not suffer a cognizable injury (Mulder v. Kohl’s Department Stores, Inc., February 1, 2016, Saylor, F.).

Allegations that Dooney & Bourke, Inc., engaged in false discount pricing by offering outlet store merchandise at purported discounts from fabricated original prices could not be sustained absent facts indicating why and how the pricing was false and directly related to the purchase of the merchandise, according to a federal district court in San Diego, California (Rael v. Dooney & Bourke, Inc., July 22, 2016, Miller, J.).

Consumers plausibly alleged that Kate Spade and Co.’s made-for-outlet merchandise was of inferior quality, that Kate Spade’s sales prices for the merchandise were artificially inflated, and that consumers were deceived by Kate Spade’s representations concerning sales prices, according to the federal district court in San Francisco (Pickles v. Kate Spade and Co., July 26, 2016, Chhabria, V.).

10. Consumer proceeds with individual "all natural" labeling claims against Dole, class claims stymied

In an unpublished decision, the Ninth Circuit allowed a consumer to proceed with individual claims that Dole Packaged Foods, LLC, falsely labeled its packaged fruit as "all natural." However, a district court properly decertified the consumer class, since the lead consumer did not explain how it could calculate a premium with proof common to the class. It also correctly dismissed the consumer’s "outlandish" claim based on the sale of illegal products. The Ninth Circuit also dismissed the consumer’s claims for the sale of illegal products because he was not influenced by the statements, and could therefore not state a claim derived from those statements (Brazil v. Dole Packaged Foods, LLC, September 30, 2016, per curiam).

A number of "all natural" labeling cases were stayed pending the outcome of this case, but it is yet to be seen whether other courts will also rely on FDA warning letters in such suits.

Outlook for 2017

The advertising and marketing industry generates billions in revenue, stimulates sales, creates jobs, and drives the creation and implementation of new technology. That technology has allowed advertisers to reach consumers in new and inventive ways, and to track consumers’ every movement, online and off. The FTC has been an active and vocal proponent of making sure that even as technology changes, advertisers continue to follow long-standing rules on deception and consumer protection.

The continually changing forums for reaching consumers, explosion of technology in our homes, cars, and on our persons, and the importance of personally identifiable information will continue to drive the FTC’s enforcement actions. This is especially concerning to the FTC in the area of marketing to and data collection from children. Interactive toys, wearable tech, and social media allow advertisers to reach children in ways not possible before. As the population ages, the FTC will also focus on dietary supplements, brain-training games, and health apps that seek to exploit senior citizens. Environmental claims will also be a leading concern for the FTC, given the focus of consumers and companies on "green" goods and services.

Attorneys for brands and consumers will also continue to keep companies in check through Lanham Act and state consumer protection laws. The stream of "all natural" labeling cases does not seem to be slowing, and it is likely that deceptive pricing and "sale" cases will continue, especially in the context of online sales.

Uncertainty abounds with administration change in Washington

President-elect Donald Trump provided little insight into the direction his administration will take with respect to the FTC, advertising, and consumer protection issues while on the campaign trail. While it is possible that the legislative log-jam that has plagued Congress for the past few years will be broken now that Republicans control both houses of Congress and the White House, it is unclear how this will effect advertisers, marketers, and consumers in general.

Former FTC Commissioner Joshua Wright is leading the transition efforts for the FTC. Wright served a little over two years on the Commission, and had to recuse himself from matters pertaining to Google because some of his research had been funded indirectly by Google. During his time with the FTC, Wright pushed for the Commission to adopt formal agency guidelines with respect to the FTC’s enforcement of Section 5 of the FTC Act. Since the last Republican administration, the FTC has expanded its use of Section 5 of the FTC Act to challenge companies’ allegedly misleading advertising, deceptive marketing, and unsecure privacy policies.

The other major issue facing advertisers is whether Congress and President-elect Trump will move forward on legislation that would reduce the tax deduction companies may take for advertising spending. Currently, companies can deduct every dollar they spend on advertising as ordinary and recurring business expenses. The proposed ad tax law, put forth by Republicans in 2014, would reduce the deduction to 50 percent of advertising spending in the current year. The other half would be capitalized, then amortized over the following 10 years, at a flat rate of one-tenth per annum. Also, this year, Senator Al Franken (D-Minn) introduced legislation that would end the tax break that drug makers can take for advertising prescription drugs to consumers. Advertising industry experts have opined that a change in tax policy could result in billions lost in economic output as well as job loss.

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