Stay ADvised: What's New This Week, July 8

Articles

• Federal Court Bans Direct Marketing Scheme from Operating Following FTC Action
• FTC Obtains Temporary Injunction Against Deceptive Credit Repair Scheme
• Legislators, Privacy Regulators and Online Advertisers Scuffle Over Future of Advertising Regulation
• Oatly Discontinues "No Sugar Added" Advertising Claims Following NAD Decision
• Owlet Baby Care Modifies Disclosures After NAD Inquiry Into Smart Sock Baby Monitor

Federal Court Bans Direct Marketing Scheme from Operating Following FTC Action

In late June, a Federal Court ruled in favor of the Federal Trade Commission by ordering defendants accused of operating a deceptive direct marketing scheme targeting newspaper subscribers with inflated subscription renewal notices to cease its operations and pay almost $9 million in monetary damages.

Following a five-week trial, the U.S. District Court for the District of Oregon issued the order permanently banning dozens of individual and corporate defendants collectively captioned in the Order as Adept Management, Inc. et al, from running deceptive direct marketing campaigns and from making any misrepresentations in connection with the general sale of goods or services.

The matter began after the FTC filed a complaint in April 2016 accusing the defendants of misrepresenting their affiliation with more than 375 newspapers and magazines including the New York Times, The Wall Street Journal, The Seattle Times and The Denver Post in order to obtain subscription renewals. Specifically, the defendants sent consumers marketing mailings for newspaper and magazine subscriptions labeled “Notice of Renewal/New Order” despite having no affiliation with most of the represented publications.

Adding insult to injury, despite impressions that consumers were getting the lowest price available, defendants’ offers were for overly inflated prices, in many instances up to 40 percent more than the regular subscription price offered by publishers themselves.

In addition, customers who purchased renewals from the scheme complained about late delivery and mix-ups with the subscriptions.

“The deceptive mailing operation spanned decades, evolving over multiple iterations but maintaining the same business structure and using the same or a very similar mailer,” wrote Judge Mark D. Clarke in the court’s Findings of Fact and Conclusions of Law. “The deceptive mailing operation continued despite countless consumer complaints, government and private lawsuits, and multiple cease and desist letters from publishers dating back to at least 2010 through 2015.”

In addition to barring defendants from working in the direct marketing industry and making future misrepresentations in connection with the general sale of goods and services, the court’s Order also enjoins the defendants from receiving any benefit from consumer information obtained while they ran the illegal scheme. Further, funds from the $8.9 million judgment imposed by the court against the corporate defendants and three of the individual defendants will be used to offer redress to affected consumers.

Key Takeaways

In contrast to a majority of FTC actions, which are often resolved through settlement, this matter went to trial and did not go well for defendants. Key here, Judge Clarke found defendants’ fine print disclosure that they “do not necessarily have a direct relationship with the publishers or publications” on the back of the offers insufficient to overcome the general misimpression that they were acting on behalf of the publishers.

FTC Obtains Temporary Injunction Against Deceptive Credit Repair Scheme

The U.S. District Court for the District of Connecticut temporarily enjoined Grand Teton Professionals, LLC, various related entities, and their principals from operating their credit repair businesses and engaging in any further violations of law as alleged in a complaint filed by the Federal Trade Commission. The order also temporarily freezes the company’s assets.

In its complaint, the FTC alleged that Connecticut based Grand Teton currently, and has for several years, conducted a credit repair scheme that falsely claims to repair customers’ credit and charges illegal upfront fees for its service, in violation of the Federal Trade Commission Act, the Credit Repair Organizations Act, the Telemarketing Sales Rule, the Consumer Review Fairness Act, the Truth in Lending Act, and the Electronic Funds Transfer Act.

According to the FTC’s complaint, since at least 2014, Grand Teton and individual defendants Douglas Filter and Marcio G. Andrade tricked consumers out of more than $6.2 million in its illegal credit repair scam. In unsolicited communications and on websites, the defendants made a number of false promises about their ability to improve consumers’ credit score by, among other things, removing all negative items and hard inquiries from credit reports and substantially improving scores by “piggybacking” them as authorized users of other accounts. In most cases, the FTC alleged, consumers did not see any substantial improvements in their credit score.

Along with alleging that the defendants charged illegal upfront fees for its purported credit repair services, the complaint also claimed that the defendants failed to provide consumers with required disclosures about its services. Moreover, Grand Teton allegedly urged consumers to file false affidavits claiming to be authorized users of other’s accounts. When consumers complained about lack of results or disputed the illegal fees, the company allegedly threatened legal action and in many instances withdrew funds from consumers’ bank accounts without proper authorization and used illegally-created checks to pay for the credit repair services they offered.

“A good credit score can help you buy a home, get a business loan, or finance an education,” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. “These companies preyed on consumers who wanted to clean up their credit by making false promises and taking illegal upfront fees.”

Key Takeaways

Although the case is in its early stages and Grand Teton is only subject to a temporary injunction at this time, this action nevertheless demonstrates the FTC’s zealous pursuit of companies that engage in deceptive and illegal credit repair schemes. As FTC Director Smith emphasized, credit scores can have a vital impact on some of the most important financial purchases of consumers’ lives.

Legislators, Privacy Regulators and Online Advertisers Scuffle Over Future of Advertising Regulation

As consumer and regulatory concerns continue to grow about the collection, use, and sharing of consumer information online, lawmakers are battling advertisers in the struggle to shape the future of online privacy regulation. Recent legislation proposed by federal and state lawmakers aim to overturn the traditional privacy landscape by giving consumers more access to and control over the use and sale of their data, and advertisers are responding in force with their own proposals.

Online privacy is a hot button issue for consumers, regulators, and legislators, fueled by the growing number of privacy breaches by big name brands and recent enforcement of the (relatively new) European General Data Protection Regulation across the pond.

On this side of the Atlantic, two recent legislative initiatives that seek to strengthen consumer privacy protections are California’s Consumer Privacy Act (CCPA) and the Senate’s proposed “Do Not Track” registry. Both of these laws require advertisers to do more than merely provide consumers with information about their privacy practices and, more importantly, contain enforcement mechanisms with real teeth.

The CCPA, which goes into effect on January 1st of next year, will require companies that collect personal information to inform consumers about the type of data they have about them and how it is used, and provide consumers with the right to opt out of the sale and request deletion (subject to several exceptions) of their data. The CCPA tasks the California Attorney General with general enforcement authority but also provides a consumer private right of action for certain data breaches that result from inadequate protection mechanisms.

Similarly, the “Do Not Track” registry proposed by freshman Senator Josh Hawley, R-Mo., would allow consumers to block companies from collecting any data “beyond that which is indispensable,” according to Senator Hawley. Envisioned to work in much the same way as the “Do Not Call” registry for telemarketers, the legislation would prevent advertisers and companies from collecting any data on consumers beyond what is necessary for the provision of the company’s online services and discriminating against consumers who elect to not be tracked online. Under the proposed legislation, the FTC would be tasked with maintaining and enforcing the registry.

Advertisers say the privacy regulation debate is not so clear cut, and that laws seeking to empower consumers are largely ineffective and may ultimately cause more harm than intended by burdening consumers. They have countered by launching the Privacy for America coalition to push for national legislation that instead of banning certain data practices would promote responsible data usage by advertisers and companies.

According to David LeDuc, the vice president of public policy at the Network Advertising Initiative, the leading self-regulatory association for third-party online advertisers, a ban on collecting data would be “technically impractical to maintain.” Instead of regulating how advertisers use online data, Privacy for America would ban practices that are “unreasonable and worthy of punishment,” said LeDuc.

“Our proposal seeks to shift the focus away from making consumers the protectors of their own data and instead put the responsibility on businesses to be good data stewards,” LeDuc said. “The notion that consumers will be protected simply by saying, 'Don’t collect my data,' is not practical.”

Key Takeaways 

Legislative and regulatory initiatives in the privacy arena, while designed to empower and protect consumers, will, according to industry spokespeople, impact advertisers and online publishers that rely on consumer data and targeted advertisements to support the free online services they provide. It remains to be seen what impact current laws such as the CCPA will have on the online advertising ecosystem and whether bills such as the Do Not Track registry will gain traction in Washington and the state houses.

Oatly Discontinues "No Sugar Added" Advertising Claims Following NAD Decision

Oatly, Inc. has agreed to discontinue advertising claims that its oatmilk products contain “no added sugar” following a successful challenge before the National Advertising Division (NAD) by competitor Campbell Soup Company on behalf of its subsidiary Pacific Foods of Oregon LLC.

The challenge before the NAD centered around “no sugar added” claims that Oatly made on the Nutrition Facts Panel and on product advertising for its Barista Edition Oatmilk, Oatmilk Chilled, Low-fat Oatmilk Chilled, and Chocolate Oatmilk Chilled products.

The NAD is the self-regulating arm of the advertising industry and a division of the Better Business Bureau National Program’s self-regulatory and dispute resolution programs.

Campbell challenged certain of Oatly’s claims related to the sugar content in its products, such as “includes 0g Added Sugars,” “Includes 8g Added Sugars” (for Chocolate Oatmilk Chilled product only), has “No added sugar(s),” and that “We don’t add sugar (We thought it was worth repeating).”

Campbell averred that the claims are misleading even though Oatly does not explicitly add sugar to these products because the hydrolysis process that turns oats into “oatmilk” creates sugars as the oats are broken down, in effect invalidating the “no added sugars” claim.

Oatly countered that it makes its “includes 0g added sugars” claims on labels pursuant to the Food and Drug Administration’s new “added sugars” rule, which goes into effect on January 1, 2020.

The NAD agreed with Campbell, partially, by recommending that Oatly discontinue the “no added sugars” claims on its advertising only. It stressed that its recommendation did not apply to any claims appearing on Oatly products’ Nutritional Facts Panel because information found on the nutritional facts is not advertising as defined by Advertising Self-Regulatory Council (ASRC) procedures and is outside the scope of NAD review.

When that same information is used in advertising, the NAD explained, it can be treated as a paid commercial message. In that context, the “no added sugars” line was an advertising claim and subject to the NAD’s review.

“Nothing in the decision prevents Oatly from using the ‘added sugars’ line of the Nutrition Facts Panel” in a context that is not advertising, such as on product packaging for the purpose of complying with FDA regulation,” according to the NAD’s press release.

The NAD added that it was able to review the truthfulness of the “no added sugars” claim and make its recommendation that Oatly discontinue using it because of current uncertainty about whether the FDA requires Oatly to make that claim, due to the status of the new law. If there was regulatory clarity that the FDA’s “added sugars” rule requires Oatly to claim that its oatmilks contain no added sugars as “mandated or expressly approved by federal law or regulation,” the NAD would not have had the jurisdiction to make a recommendation about the claim.

Oatly said in a statement that it “supports the self-regulatory process and agrees to comply with NAD’s recommendations,” and is continuing to seek greater regulatory clarity regarding “hydrolysis-related sugars,” according to the NAD’s press release announcing the matter. Oatly also said it had taken steps to make sure that no “sugar-free claims” appear on third-party websites.

Key Takeaways

This matter sits at the intersection of where advertising claims and regulatory mandated information collide. Although NAD noted that “deference to regulatory authority is not automatic, and it never completely replaces the obligation of the self-regulation system to exercise its own sound discretion,” its recommendation did not go beyond FDA authority. The case is also instructive of how the NAD treats advertising of information appearing on nutritional labels. If the recommendations about Oatly are any indication, the NAD will clearly differentiate between claims made in a regulatory-mandated disclosure context and claims made in an advertising context.

Owlet Baby Care Modifies Disclosures After NAD Inquiry Into Smart Sock Baby Monitor

In a separate matter, the NAD recommended that Owlet Baby Care modify certain disclosures for its Smart Sock Baby Monitor to clarify and more accurately reflect the product’s capabilities.

Owlet’s Smart Sock is a wearable baby monitor device that collects information about a baby’s oxygen level and heart rates and alerts parents when they deviate from normal levels while the baby sleeps. This information can be helpful to parents who want to monitor their baby while sleeping to make decisions in guarding against Sudden Infant Death Syndrome (SIDS).

NAD began investigating Smart Sock as part of a routine monitoring program in regards to certain claims the company was making about its product. Although NAD concluded that some claims made by Owlet about Smart Sock are supported, it found that the company also communicates unsupported messages about the product.

The self-regulatory body requested substantiation for a few of Owlet’s product efficacy claims, such as “[the product] glows green to reassure you the baby is ok but will notify you if heart rate and oxygen levels leave preset zones” and that “the Smart Sock comfortably wraps around your baby’s foot to track heart rate and oxygen levels using clinically-proven pulse oximetry.” After reviewing confidential studies submitted by Owlet, NAD concluded that the claim that Smart Sock provides information on heart rate and oxygen levels is substantiated.

However, it took issue with the claim that Smart Sock will “reassure you that the baby is ok” and gives parents “peace of mind,” finding the implied claim that Smart Sock could prevent SIDS and save a baby’s life unsupported. Owlet acknowledged that products like the Smart Sock do not prevent SIDS.

NAD recommended that Owlet modify its product disclosures to clarify that Smart Sock is intended to be used purely for informational purposes, does not prevent SIDS, and should not be used as a substitute for a medical monitor. It also recommended that Owlet remove claims that the product can provide “peace of mind” and that the disclosures appear in a conspicuous location where they are easy to read and comprehend.

NAD also reviewed testimonials for the products - stories from parents about how Owlet helped them and how they utilized Smart Sock’s notifications to make decisions about the care of their babies. NAD concluded that these stories are accurate and do not overstate the product’s capabilities.

Owlet said in a statement that it would comply with the NAD’s recommendations and that it “appreciates the opportunity to participate in NAD’s self-regulatory process.”

Key Takeaways

NAD’s inquiry into Owlet and the Smart Sock illustrates the power and success of industry self-regulation to monitor the marketplace without the need for regulatory intervention. Here NAD found the advertiser’s express efficacy claims generally supported, but warned against claims that the product can give parents “peace of mind” and possibly save a baby’s life, as implying that the product can do more to prevent SIDS than it actually can, which can lull parents into a false sense of security.