On August 20, a Northern District of California court stayed the trial of an action the FTC brought against Lending Club in 2018 pending a Supreme Court ruling on the FTC’s authority to seek monetary restitution under Section 13(b) of the FTC Act. The issue of whether the FTC has authority to seek monetary relief under Section 13(b) was placed squarely before the Supreme Court in two petitions for certiorari that were consolidated and accepted for review by the High Court in July. Those cases, F.T.C. v. Credit Bureau Center and AMG Capital Management, LLC v. F.T.C., will be argued in October.

In its LendingClub complaint, the FTC had sought substantial monetary relief from LendingClub pursuant to its authority under Section 13(b), in the form of “rescission or reformation of contracts, restitution, the refund of monies paid, and the disgorgement of ill-gotten monies.” The trial in LendingClub had been scheduled for October. In finding a stay of that trial warranted, the LendingClub court emphasized that the FTC’s authority to seek monetary relief under Section 13(b) (or lack thereof) is “an issue of enormous consequence to this case.” The court explained, “[g]oing forward with trial would needlessly burden LendingClub to put on a trial defense only to possibly have the entire enterprise mooted by the FTC’s inability to seek any monetary relief under Section 13(b).”

The FTC had argued that the hardship of presenting a meritorious defense while the Supreme Court’s 13(b) decision was pending did not merit a stay. The LendingClub court soundly rejected the FTC’s argument, finding that the issue was not simply about hardship, but about “the viability of the remedy motivating the case.” Given that the remedy itself has the potential to be extinguished in the coming months, the court concluded that holding a trial before the Supreme Court’s decision issues “is fundamentally inequitable.” The LendingClub court noted a Supreme Court ruling limiting the FTC’s powers under Section 13(b) would “greatly simplif[y]” the case, “as no monetary relief will be at issue.” The court predicted that “the elimination of monetary relief will likely facilitate a negotiated resolution.”

 

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A recent NAD decision that focuses on detergent claims touches on some issues – including implied claims and disclosures – that are relevant to all advertisers. The decision covers a lot of ground, but we’ll focus on a few key points that translate across industries.

The front label of Tide’s Purclean bottle prominently features the product name against a green, leafy backdrop. Tide Purclean LabelDirectly under that are the words “plant based.” And below that, there is a line, under which are various things, including a “USDA Certified Biobased Product” seal with “75%.”

The challenger argued that consumers are likely to interpret the label to mean that the product is 100% plant-based. Tide countered that the 75% disclosure on the USDA seal, coupled with information on the back of the label, clarified that the product was only 75% plant-based.

NAD agreed with the challenger. “Although the seal discloses the amount of bio-based content, 75%, it does so in very small font such that it does not meaningfully qualify the overarching unsupported message reasonably conveyed to consumers that the entire product is bio-based.”

The battle continued on the back of the label, which featured the headline “A Powerful Plant-Based Clean You Can Feel Good About” followed by a list of ingredients. The ingredients are identified as plant- or mineral-based,” except for petroleum-based ingredients, which are simply identified as “cleaning aids.”

NAD was concerned that the headline could create the false impression that all the ingredients are bio-based. The “cleaning aids” heading didn’t help clear up that impression. In a footnote, NAD clarified that ingredient list standing alone “would not be problematic were it otherwise clear that the product formula was 75% plant based.”

Whether you’re advertising detergent or something else, consider how consumers are likely to interpret your labels and ads. Even if your claims are true, if the overall message could create a misconception, arguing that you presented the information necessary to clear up that misconception in a small disclosure may not save you.

The California Office of Administrative Law today approved the CCPA Regulations that the California Attorney General submitted in June, and the regulations are effective immediately. As we discussed here, the now-final regulations, for the most part, substantively match those that the AG released in March, with a few notable changes.

Significantly, the AG has removed the shortened “Do Not Sell My Info” language throughout the final regulations to align with the statutory language. While the final regulations do not explicitly prohibit abbreviations, this removal indicates that businesses must include the full “Do Not Sell My Personal Information” language in their website link to an opt-out request. This is consistent with the statute, which requires businesses to include “a clear and conspicuous link on the business’s Internet homepage, titled ‘Do Not Sell My Personal Information’” that links to an opt-out request. Apparently, there is no room for flexibility on this display.

The Addendum to the Final Statement of Reasons also identifies four other provisions that the AG has “withdrawn”:

  • Former § 999.305(a)(5) requiring a business to provide notice and obtain explicit consent prior to using a consumer’s personal information for a “materially different purpose” than disclosed in the notice at collection.
  • Former § 999.306(b)(2) requiring businesses that substantially interact with consumers offline to provide consumers with an offline notice informing them of their right to opt-out.  In other words, there is no longer an express requirement to provide an offline Do Not Sell My Personal Information notice, such as a paper form or store signage. Notably, the obligation to provide an offline Notice at Collection still applies.
  • Former § 999.315(c) indicating that a business must implement an easy opt-out method for consumers, and must not use a method that would impair a consumer’s decision to opt-out (though a business is still required to consider ease of use when implementing an opt-out method).
  • Former § 999.326(c) permitting a business to deny a request from an authorized agent who does not submit proof of consumer authorization (though a business may still require a consumer to verify his or her identity directly with the business when using an authorized agent, and the business may deny opt-out requests from an authorized agent if the agent cannot provide signed permission that demonstrates authorization from the consumer).

While the Addendum does not provide any rationale for these withdrawals, it notes that the AG “may resubmit [the withdrawn] section[s] after further review and possible revision.” The Addendum also identifies other “non-substantive changes” the AG has made, including grammatical and syntax modifications.

While July 1 marked the CCPA’s enforcement date, the finalized regulations solidify an entity’s requirements under the CCPA to comply with the CCPA as clarified through the now-finalized regulations. With each violation subject to a penalty of between $2,500 and $7,500, entities should carefully review their current CCPA practices to ensure compliance with both the statute and the final regulations.

If you have questions on how the finalized regulations may affect your business, please contact Alysa Hutnik and Lauren Myers.  If you have other CCPA questions, please see our other CCPA blog posts and our Advertising and Privacy Law Resource Center.

Last week the FTC filed suits against a few online merchandisers regarding their alleged failures to promptly deliver personal protective equipment (PPE) to consumers. The lawsuits allege that three online sellers violated the FTC’s Mail Order Rule, which mandates that companies notify consumers of shipping delays in a timely manner and give them the option to cancel orders and receive prompt refunds.

In its complaint against Zaappaaz, Inc, the FTC alleges that wrist-band.com “guaranteed” same day shipping of COVID-related products, but took weeks to ship orders and failed to inform consumers of delays. The complaint also cites multiple instances of incorrect or defective products received by consumers for which the company denied refeeds, as well as un-kept promises of refunds to consumers who never received their purchased products.

The FTC also alleges that American Screening, LLC, Ron Kilgarlin Jr., and Shawn Kilgarlin violated the Mail Order Rule by stating that PPE products would be shipped “within 24-48 hours,” when many items were not shipped until weeks or months later.

All sellers offering products via website or catalog should take note and review existing compliance practices. Our breakdown of the Mail Order Rule can help companies navigate the requirements. Our recent article, Top FTC Rules and Guides You Should Keep in Mind, may also be useful.

 

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This is not another post about coronavirus claims, but we do need to start there.

Truvani makes a dietary supplement that was formerly called “Under the Weather.” The company’s webpage devoted to that supplement featured reviews from various users, including the following:

  • Michael K. (Verified Buyer): “Very happy with the product, I feel BC so well protected from COVID-19 with your supplements….”
  • Theresa O. (Verified Buyer): “I really think I had undiagnosed corona virus. Nothing helped. Until I started taking under the weather. A few days later I started improving. I haven’t stopped taking it since.”

NAD was concerned that the reviews were presented as testimonials and that they conveyed an unsupported message regarding the product’s ability to protect against COVID-19. In response, Truvani pointed to Section 230 of the Communication Decency Act and argued that the reviews were independent content provided by third parties, rather than ads.

NAD disagreed, noting that “customer reviews on a company’s website may be advertising if they are curated

The decision doesn’t provide a lot of information about the context in which the reviews appeared or how they were collected, so it’s hard to know exactly where Truvani went wrong. However, this case serves as a good reminder that while companies are generally not liable for the content of consumer reviews (as illustrated by this case), they can be held liable if they promote those reviews or curate them in a misleading manner.

This summer continues to be a busy season at the intersection of data protection and national security. As we reported in July, the Schrems II decision invalidated Privacy Shield on the ground that its national security derogations were too expansive.

Last week, the President seized on concerns about surveillance by the Chinese government as a core rationale for Executive Orders directing the Department of Commerce to prohibit transactions involving TikTok (and its parent company, ByteDance) and WeChat (and its parent company, Tencent Holdings).  For instance, the TikTok Order asserts that the company’s data practices “potentially allow[] China to track the locations of Federal employees and contractors, build dossiers of personal information for blackmail, and conduct corporate espionage;” and the WeChat Order states that WeChat’s data collection “threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information.”

The scope of these Orders remains unclear.  Members of Kelley Drye’s Export Control and Sanctions team provide further analysis on Kelley Drye’s Trade and Manufacturing Monitor (see below), and we will continue to monitor how implementation of the Orders could affect companies’ communications and transactions on these popular platforms.

Last Thursday, the President issued two executive orders (“E.O.s”) targeting social media applications TikTok (and its parent company, ByteDance) and WeChat (and its parent company, Tencent Holdings).  The E.O.s direct the Department of Commerce (“DOC”) to prohibit transactions involving the applications.  Companies that deal directly with TikTok or WeChat in the United States and abroad or use their services need to evaluate the scope of those activities and determine if they will be affected by the E.O.s.

The E.O.s were issued pursuant to the national emergency declared in E.O. 13873 regarding information and communication services in the United States that are controlled by persons within the jurisdiction of a “foreign adversary.”  In issuing the E.O.s, the President cited concerns that the Chinese government could gain access to Americans’ personal information collected by the applications, among other policy considerations.  The President has the power to issue the directives under the International Emergency Economic Powers Act (“IEEPA,” 50 U.S.C. 1701 et seq.), which provides the President with the authority to declare national emergencies and implement sweeping trade controls based on national security concerns.

The intended scope of the E.O.s is not clear due to ambiguous language used in Section 1, which contain the E.O.s’ primary prohibitions.  Here is an excerpt of that section from the TikTok order:

Section 1.  (a)  The following actions shall be prohibited beginning 45 days after the date of this order, to the extent permitted under applicable law: any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, with ByteDance Ltd. (a.k.a. Zìjié Tiàodòng), Beijing, China, or its subsidiaries, in which any such company has any interest, as identified by the Secretary of Commerce (Secretary) under section 1(c) of this order.

[…]

(c)  45 days after the date of this order, the Secretary shall identify the transactions subject to subsection (a) of this section.

There are two plausible readings of that section.  The first is that all transactions involving ByteDance and its subsidiaries will be prohibited within 45 days.  The second, and we believe more appropriate reading, is that all types of transactions specified by DOC will be prohibited.  The inclusion of the last sentence of Section 1(a) and of Section 1(c) suggests that DOC has discretion to impose targeted prohibitions that only apply to certain types of transactions involving the subject companies, rather than all transactions involving ByteDance.  While the ultimate scope of the prohibitions may not be clear until DOC takes action, the term “transactions” is often interpreted broadly, and could include many types of business dealings, not just financial transactions involving the companies.  The White House is reportedly pushing for a broad interpretation of both E.O.s, noting that prohibited transactions could include making the apps available on app stores, purchasing advertising on TikTok, or accepting terms of service to download the applications.

It is also important to note that the TikTok and WeChat E.O.s differ in scope.  The TikTok E.O. authorizes prohibitions on any transaction involving ByteDance and its subsidiaries.  In contrast, the WeChat E.O. is more narrowly constructed to authorize prohibitions on transactions with Tencent Holdings or its subsidiaries that are “related to WeChat.”  The more narrow construction with respect to Tencent may be intended to exclude Tencent’s many U.S. investments unrelated to WeChat from coverage under the E.O.

Much remains unclear about the intended scope and ultimate application of the E.O.s.  Given this regulatory uncertainty, companies with business dealings directly or indirectly involving ByteDance or Tencent should review their engagements closely for potential exposure under the new rules.  In particular, companies that use WeChat services for commercial purposes, including its IT and payment services, will need to evaluate whether they can continue that activity in the United States and abroad.

Please contact our Export Control and Sanctions team with any questions related to these developments.

Continue Reading Data Protection and National Security Concerns Meet in TikTok, WeChat Executive Orders

Subscription plans that automatically renew at the end of a term are becoming more popular with companies. They’re also getting more attention from regulators and class action attorneys. As we’ve discussed before, some states regulate how these plans can be structured, and there have been both lawsuits and regulatory investigations targeting companies that have failed to comply. One of the latest lawsuits alleges that Ancestry.com has violated California’s automatic renewal law.

The law generally requires that companies: (1) clearly disclose material offer terms before a consumer subscribes; (2)

The plaintiff alleges that Ancestry.com did not adequately disclose the offer terms, obtain her consent, or provide the required confirmation. As a result, she was surprised to see recurring monthly charges after her free trial. She claims not to be the only one in this position, either, and the lawsuit cites hundreds of complaints against the company on various public websites. The plaintiff is seeking injunctive relief and restitution which, according to Ancestry.com’s removal notice, could exceed $250 million.

Based on the screen shots attached to the complaint, there are references to monthly charges during the order flow and there is a link to the company’s “Renewal and Cancellation Terms” before checkout. Those Terms provide more disclosures and details on the company’s policies. It’s likely, then, that one of the key issues in the case will be whether the disclosures appear with the level of clarity required by law.

There are at least two lessons to keep in mind here. First, this is an area where we’re likely to see continued litigation. If you haven’t taken a look at how you present your automatic renewal terms recently, now might be a good time to do that. Second, although consumer complaints on public websites rarely tell the whole story, they can provide a warning of trouble to come. Make sure you monitor these complaints so you can prevent them from escalating.

It has been more than two years since the D.C. Circuit found the Federal Communications Commission’s (the “FCC”) discussion of predictive dialers and other equipment alleged to be an automatic telephone dialing system (“ATDS,” or “autodialer”) to “offer no meaningful guidance” on the question. In the absence of an FCC ruling on the remand, multiple courts of appeals have addressed the statute’s definition. In the most recent case, Allan v. Pennsylvania Higher Education Assistance Agency, the Sixth Circuit adopted (in a split decision) a broad definition of an autodialer. Construing the term ATDS to include both devices that “generate[] and dial[] random or sequential numbers,” and “that dial from a stored list of numbers,” the Sixth Circuit has aligned itself with the Second and Ninth Circuits in a growing circuit split, with the Third, Seventh and Eleventh Circuits adopting a narrower interpretation. At this point, all eyes are on the Supreme Court, which accepted a case addressing the ATDS definition for next term.¹ The FCC, meanwhile, is not likely to address the core ATDS definition until after the Supreme Court ruling.

Case Background

Allan came before the Sixth Circuit on appeal of the district court’s entry of summary judgment for plaintiffs. Plaintiffs alleged that defendant had placed 353 calls to them using an ATDS after they had each revoked consent. The district court held that defendant’s system qualified as an autodialer. It was undisputed that the system did not randomly or sequentially generate numbers. It would place calls to a daily-created list based on a stored list of a numbers in connection with collection of specific individual’s private education loan debt. By a 2-1 majority, the Sixth Circuit concluded that equipment may be an ATDS if it has the capacity to store numbers to be called, or to produce numbers using a random or sequential number generator, and to dial such numbers.

Majority Opinion

The majority opinion found that the ATDS definition is facially ambiguous. The TCPA defines an ATDS as “equipment which has the capacity to store or produce telephone numbers to be called, using a random or sequential number generator” (and the capacity to dial those numbers automatically). The opinion engaged in a grammatical analysis of the statutory text to resolve the definition’s latent ambiguity, which interpretation it then confirmed with reference to relevant statutory and administrative history.

The Sixth Circuit concluded that a predictive dialer or system that dials from a stored list could qualify as an ATDS under the TCPA. The Court relied on the existence of exceptions to help establish the rule. For example, the Court confirmed that the “prior express consent” exception permits calls made using an autodialer if the recipient has given his or her prior express consent to receiving those calls. Thus, it reasoned, “[a]n exception for consented-to calls implies that the autodialer ban otherwise could be interpreted to prohibit consented-to calls. And consented-to calls by their nature are calls made to known persons, i.e., persons whose numbers are stored on a list and were not randomly generated.” Ergo, the Court held that the definition of an ATDS must broadly sweep in stored-number systems and predictive dialers, not just calls to unknown individuals via random or sequential number generation.

Delving into the TCPA’s legislative history, the Court highlighted Congress’s intent to crack down on pervasive and intrusive telemarketing practices. Rather than regulate certain types of technology used to place calls, the TCPA was meant to curb the calls themselves – particularly the near-daily, multiple calls that formed the Allan plaintiffs’ cause of action.

Consistent with every other Circuit to have addressed the issue, the Sixth Circuit reached this decision without administrative guidance, holding that prior guidance from the FCC, including those pre-2015, was invalidated by the D.C. Circuit in its 2018 decision ACA International v. FCC. While some District Courts have relied on those prior FCC orders, the Circuit Courts, with the exception of the Second Circuit, have held that the prior orders were set aside.

Importantly, the Court affirmatively declined to comment on the potential impact of human intervention on dialing because, it found, the defendant failed to present a legal basis for that argument in this case.

Dissent

The dissent disagreed with the majority’s conclusion and methodology, putting forth a third interpretation of the statutory language. Rather than modifying the verbs “store” and/or “produce,” the dissent maintained that the language “using a random of sequential number generator” should be read to modify the entire phrase “telephone numbers to be called.” In the instant case, because the telephone numbers dialed were not generated randomly or sequentially, the dissent would have held that the equipment at issue did not qualify as an ATDS.

The dissent gave four reasons why its interpretation was the “best” reading among the three possible interpretations. First, it does not require a judicial rewrite of the statute as does the definition of an ATDS that includes stored-number systems: even if unartfully drafted, it is grammatically correct. In contrast, the majority’s definition requires a grammatically incorrect reading of the statute. Second, it avoids the problem of superfluity associated with a definition of ATDS that excludes stored-number systems (thereby rendering the term “store” in the statute’s definition surplusage). Third, the dissent concludes that the interpretation is consistent with the FCC’s early orders interpreting the TCPA. The FCC’s early definitions of an ATDS define it “as a device that uses a random or sequential number generator.” And fourth, the dissent argues that Congress’s intent was in fact to curb the use of machines that dialed randomly or sequentially generated numbers, pointing out language from an early congressional hearing to that effect. (KDW note: This argument is similar to the argument made by then-Commissioner Ajit Pai in dissent to the 2015 FCC decision that was overturned in ACA International v. FCC.)

What Comes Next

The Sixth Circuit’s position only further deepens the divide between the Circuits with six, evenly split Circuits having offered their positions. In the short term, the Allan decision expands the definition of an ATDS for callers and litigants in the Sixth Circuit; thus, increasing the potential risks and exposure.

The Allan decision is not likely to have lasting effect, however, because the United States Supreme Court has accepted a case to address the ATDS definition. The Sixth Circuit’s reasoning in Allan closely tracks the Ninth Circuit’s decision in Duguid v. Facebook, 926 F.3d 1146 (9th Cir. 2019). That decision has been accepted for review by the Supreme Court and will be argued in the fall. The resolution of the appeal should settle the question of what is an ATDS, providing (we hope) consumers and businesses alike with clear guidance on permissible autodialing systems.

Interestingly, the defendant in Allan had opposed a motion to stay the pending appeal until the Supreme Court reached a decision in Facebook. With this unhelpful ruling in hand, the defendant in Allen may file its own petition for certiorari, and/or seek further review by the Sixth Circuit en banc.


[1] These circuits stand opposite to the Seventh and Eleventh Circuits, which hold that an ATDS must use a random or sequential number generator. Although the Third Circuit has also weighed in Dominguez v. Yahoo, Inc., 894 F.3d 116 (3d Cir. 2018), the Allan court took the position that it did not expressly construe the definition. “The Third Circuit has not expressly addressed this question, but it did assume (without providing any analysis) that an ATDS must use a random or sequential number generator.” Allan at 5, n.3; but see Dominguez v. Yahoo, Inc., 629 F. App’x 369 (3d Cir. 2015) (considering “the definition of ‘random or sequential’ number generation” and confirming “the phrase refers to the numbers themselves rather than the manner in which they are dialed.”)

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Last month, a California court, for a second time, dismissed a class action complaint asserting that Ghirardelli’s advertising for its “Classic White” “Premium Baking Chips” created the false impression that the product contained real chocolate—this time with prejudice.  Plaintiffs in Cheslow v. Ghirardelli Chocolate Co., Case No. 19-cv-07467-PJH, alleged that they purchased Ghirardelli’s product because they believed it contained white chocolate, when in fact it does not contain any chocolate at all.  The complaint asserted statutory claims under California’s Unfair Competition Law, False Advertising Law, and the Consumer Legal Remedies Act.

Plaintiffs claimed that they purchased Ghirardelli’s “Premium Baking Chips,” which the packaging described as “Classic White Chips,” because they believing that the term “White” described the type of chocolate in the product, and the term “Premium” denoted that the product was made with real chocolate, as opposed to a “cheap knock-off.”  In April, the court dismissed the original Complaint without prejudice on the grounds that (1) reasonable consumers would not have assumed the term “white” described the type of chocolate in the product rather than the product’s color, (2) the term “premium” was mere puffery, and (3) because the packaging did not include any affirmative false statements, the plaintiffs could not simply ignore the ingredient list, which did not include the words “chocolate” or “cocoa.”

Plaintiffs attempted to address these deficiencies by commissioning, and attaching to its amended pleading, a consumer survey that purported to reflect that 92% of respondents that viewed the front panel of Ghirardelli’s product believed it contained white chocolate.

The court, however, found that the consumer survey results were insufficient to support the otherwise implausible false advertising claims.  The court reasoned that while in some cases courts may rely upon consumer survey evidence to bolster a finding that product representations could deceive reasonable consumers, such evidence is legally insufficient on its own to “transform an unreasonable understanding of a product into a reasonable one.”  The court also found that the consumer survey Plaintiffs relied upon was flawed.  Most importantly, the survey only showed respondents the front of the product’s packaging and not the back panel, which included important information about the product, including the ingredient list.

A number of recent lawsuits have been filed that accuse food product manufacturers (and specifically manufacturers of chocolate-based products) of misleading consumers about a product’s ingredients.  Advertisers should remain vigilant in ensuring not only that their product packaging contains no affirmative false statements, but also that they do not create an overall net impression about the product that is false or misleading to reasonable consumers.  The court’s decision in Cheslow, however, emphasizes that the existence of an accurate ingredients list – while it cannot be used to cure otherwise deceptive claims on the front of a product’s packaging – remains relevant to whether reasonable consumers would be misled by a product’s overall packaging.  The decision also puts a greater burden on plaintiffs seeking to avoid dismissal through survey evidence to ensure that the survey is itself not misleading and presents respondents with an accurate picture of what they would actually see if they reviewed the product’s packaging in its entirety.

The replay for our July 30, 2020 California Consumer Privacy Act (CCPA) for Procrastinators: What You Need To Do Now If You Haven’t Done Anything Yet webinar is available here.

The coronavirus pandemic has put many things on hold, but CCPA enforcement is not one of them. The California Attorney General’s enforcement authority kicked in on July 1, 2020, and companies reportedly have begun to receive notices of alleged violation. In addition, several class actions have brought CCPA claims. Although final regulations to implement the CCPA have yet to be approved, compliance cannot wait.

If you’re not yet on the road to CCPA compliance (or would like a refresher), this webinar is for you. We covered:

  • Latest CCPA developments
  • Compliance strategies
  • Potential changes to the CCPA if the California Privacy Rights Act (CPRA) ballot initiative passes

Anyone who has not begun their CCPA compliance efforts or thinks they need a refresher should watch this webinar.

To view the presentation slides, click here.

To view the webinar recording, click here.

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