Stay ADvised: What's New This Week, March 23

Articles

• FTC and FDA Begin Pursuing False Coronavirus Marketing Claims
• Maryland Lawmakers Pass, but Gov. Expected to Veto Digital Ad Tax Law
• TINA Calls out Makeup Brand Morphe Over Less-Than-Transparent Marketing
• False Advertising Case Against Vitamin Company May Proceed, Court Rules
• NAD Recommends Modifying Soap "Biodegradable" Packaging Claim

FTC and FDA Begin Pursuing False Coronavirus Marketing Claims 

In the first federal action taken against products advertised to cure or prevent the coronavirus , the Federal Trade Commission (FTC) and the U.S. Food and Drug Administration (FDA) have sent warning letters to seven companies accused of marketing unapproved products they claim can cure or ameliorate the virus.

The agencies warned the companies to stop making claims that their products—ranging from herbs to teas to oils and colloidal silver—can treat or prevent the coronavirus, or risk enforcement action from both agencies. The FTC asserts the advertising claims these companies are making are unsubstantiated and violate the FTC Act. Further, these claims are not FDA-approved, say the agencies, as no vaccines or drugs are currently approved by the FDA for the treatment of COVID-19 .

Among those targeted in these letters are the Jim Bakker Show, home of the infamous televangelist who advertises his Silver Solution as curing coronavirus within 12 hours, and a company called Herbal Amy that advertises a “rather extensive protocol” of herbal solutions claimed to be “strongly antiviral for corona viruses.”

The letters warn the offending companies to immediately cease making the unsupported claims or risk enforcement action, including a federal court injunction and damages to refund affected consumers who purchased the products. The letters also require the companies to notify the FTC within 48 hours of concrete steps they have taken to address the agencies’ concerns.

The FDA also noted that it intends to take violations very seriously, as it “considers the sale and promotion of fraudulent COVID-19 products to be a threat to the public health.” The agency intends to launch an “aggressive surveillance program” to monitor spurious marketing schemes advertising nonexistent -- and illegal – purported coronavirus cures. Similarly, the FTC said it would “continue to monitor social media, online marketplaces, and incoming complaints to help ensure that the companies do not continue to market fraudulent products under a different name or on another website.”

Key Takeaways

As the country and the world attempt to cope with the impact of the coronavirus pandemic, the FTC and FDA are using their enforcement powers to help safeguard consumers against false health claims for products that have the potential to exacerbate the crisis by creating a false sense of security.

The agencies have made clear that these warning letters are just the first step in legal action against companies that seek to profit from the crisis via deceptive advertising. “We’re prepared to take enforcement actions against companies that continue to market this type of scam,” said FTC Chairman Joe Simons. FDA Commissioner Stephen M. Hahn echoed the sentiment: “The FDA’s laws are designed to protect the public health by ensuring, among other things, that drugs are safe and effective for their intended uses.”

Maryland Lawmakers Pass, but Gov. Expected to Veto Digital Ad Tax Law

Hours before adjourning early because of coronoavirus fears, the Maryland legislature passed its long-anticipated, highly controversial, and likely doomed legislation to tax digital ads.

House Bill 732, which goes into effect July 1, 2020, will impose a tax on global annual gross revenues from digital advertising for companies earning over $100 million annually. Revenues received from affected companies would be subject to a tax of between 2.5 to 10 percent, depending on how much of that company’s advertising is viewed by consumers in the state. Proceeds from the tax, expected to reach approximately $50-$60 million annually, would go toward financing state education initiatives.

Aside from the benefits to education, proponents of the tax have called the measure a necessary overhaul of the state’s tax system, given how digital advertising has fundamentally changed the way businesses advertise.

Opposition to the bill was swift and fierce, with opponents claiming the law violates the federal Internet Tax Freedom Act (ITFA), which prohibits state and local taxation of internet access or discriminatory taxation of the internet. The ITFA was first signed into law by President Bill Clinton in 1998 and made permanent by President Barack Obama in 2016. Ironically, the bill’s sponsors and proponents knew of this insurmountable hurdle when the law was introduced and discussed in committee but passed it anyway. In fact, Maryland Attorney General Brian Frosh (D) wrote in a memo to the lawmakers that there is “real risk that [the law] would be held preempted [by ITFA].”

In addition to constitutional concerns, trade advertising groups also claimed the bill would have significant negative effects on the local Maryland economy by trickling down to small businesses.

Maryland Governor Larry Hogan (R) has promised to veto the bill, tweeting generally about its overall impact, “Legislators are pushing the largest tax increase in our state’s history to pay for the Kirwan Commission’s recommendations. This would destroy everything we’ve done for five years. It would destroy our economy. And I promise that it’s not ever going to happen while I’m governor.” But the legislature may have the last say as state law allows a veto to be overridden by a three-fifths vote in both chambers.

Key Takeaways

As Maryland’s tax on digital advertising moves forward, the question for opponents and proponents of the legislation is whether the measure will pass constitutional muster. Proponents point out that taxes on e-commerce also took time to gain acceptance. For example, Amazon’s sales tax on e-commerce was 25 years in the making.

On the other hand, opponents of the tax, including advertisers and the big tech companies that will be affected by the measure, maintain that the law is unconstitutional and will be doomed as was the fate of other advertising tax measures across the country, including those in Arizona, Iowa, and Florida.

TINA Calls out Makeup Brand Morphe Over Less-Than-Transparent Marketing

Popular makeup brand Morphe recently found itself in hot water with customers and advertising watchdog Truth in Advertising (TINA) over contentions that it quietly changed the formula of a popular vegan eyeshadow palette without informing its customers that the changes made the palettes no longer vegan.

In 2017, Morphe released an eyeshadow palette marketed as “completely vegan” and “100% vegan.” The item, a collaboration with beauty influencer Jaclyn Hill, was extremely popular and sold out when it was first released.

TINA recently published an alert on its website that the vegan designation may no longer apply after it learned of the change from a concerned consumer who noticed that the palette was no longer listed under the vegan beauty section on the company’s website. As TINA reported, Morphe has also publicly hedged on whether or not the product is vegan, despite listing a non-vegan ingredient directly on the product information.

According to TINA, only when the news began to spread online that the product had been removed from the “vegan” section of the online store and customers began to complain on social media did Morphe address the change in the designation at all, and even then it did not clarify whether or not the product is still vegan:

"We have seen several concerns about our original MorpheXJaclynhill palette formula modifications and ingredient changes and want to set the record straight. … While it is common in the beauty industry to make formula adjustments and improvements to keep up with industry standards, it is not customary to announce them. … We are using this as an opportunity to confirm that we indeed made formula modifications to Jaclyn’s original Morphe palette."

Criticizing the move, TINA pointed out that Morphe’s statement did not actually clarify whether the makeup palette is still, in fact, vegan. Further, Morphe’s assertion that it could not yet confirm “formula modifications” seemed to be contradicted by the inclusion of the ingredient carmine, a red dye made from crushed insects, on the product’s ingredient list on the Morphe website.

The gap between the company’s statement that it did not know whether any “formula notifications” had been made on the one hand, and the removal of the product from the company’s vegan roster, plus the addition of the carmine on the other, led TINA to conclude that Morphe was engaging in less-than-honest marketing.

Key Takeaways

Although the fallout from Morphe’s actions seems to be limited to customer complaints and TINA’s advisory, enforcement agencies like the FTC have acted on tips from the advertising watchdog before. The lesson for advertisers here is to err on the side of full transparency to avoid accusations of deceptive advertising, especially for products that consumers intentionally seek out and buy for their composition, such as vegan-based products.

False Advertising Case Against Vitamin Company May Proceed, Court Rules

A New Jersey court has refused to dismiss false advertising claims against a vitamin manufacturer alleged to have engaged in deceptive marketing of its multivitamin products. The allegations assert that the company marketed “complete” multivitamins that did not contain nutrients the Food and Drug Administration (FDA) classifies as “necessary” for “human health.”

Plaintiffs accused vitamin manufacturer Church & Dwight of violating New Jersey and Florida law by deceptively marketing its L’il Critters Multivitamins, Vitafusion Women’s Complete Multivitamins, and Vitafusion Men’s Complete Multivitamins as “complete” multivitamins. According to the suit, these representations are false and misleading because they lack the basic nutrients considered essential not only by the FDA but other federal agencies including the U.S. Department of Agriculture (USDA).

The company filed a motion to dismiss the suit in July 2019, but the court was unmoved by the vast majority of its arguments, particularly its reliance on the “primary jurisdiction doctrine” which “requires judicial abstention in cases where protection of the integrity of a regulatory scheme dictates preliminary resort to the agency which administers the scheme.”

The court ruled it had jurisdiction to hear the case since the defendant had failed to show how any FDA rulings would conflict with its own. Further, the court found unavailing the company’s claim that any decision necessitated relying on FDA expertise, as the claims at issue only required the court to determine whether defendant mislabeled the products based on the existing FDA definition for “complete multivitamins” and did not require it to define what “complete” meant, which was still under the purview of the FDA.

The court also struck down defendant’s argument that plaintiffs did not properly allege that Church & Dwight’s advertising was false or deceptive:

"Ultimately, Plaintiffs allege Defendant’s marketing and labelling of the Products was false and misleading because the term ‘complete’ leads Plaintiffs and other consumers to believe the Products contained all “essential nutrients”—even though the Products lacked vitamins deemed essential by the FDA."

Efforts to dismiss other claims including standing, and violations of the New Jersey Consumer Fraud Act and Florida’s Deceptive and Unfair Trade Practices Act, as well as breach of implied warranty under New Jersey law, failed as well. However, the court did dismiss plaintiffs’ claim for injunctive relief and breach of express and implied warranty claims under Florida law.

Key Takeaways

To make its argument that the entire complaint should be dismissed, the company relied on the doctrine of primary jurisdiction. In order for a defendant to obtain dismissal of a case based on this doctrine, there must be a “substantial danger of inconsistent rulings” should the court make the decision instead of relying on the agency, and defendants must not overstate the need to rely on agency expertise.

Regardless of that theory, it will nevertheless be difficult to demonstrate that a court lacks jurisdiction over a false advertising claim. As the court put it, “an examination of whether a product’s advertising is misleading is evenly within the conventional experience of district courts.”

NAD Recommends Modifying Soap "Biodegradable" Packaging Claim

The National Advertising Division (NAD) has recommended that S.C. Johnson & Son (SCJ) modify the claim that its Ecover dish soap is biodegradable as stated on the front label of the product.

The challenge, which was initiated by an SCJ competitor, took issue with claims appearing on the front label of the Ecover product: the “biodegradable” claim, the product is “non-toxic,” and the product contains a “100% natural fragrance.” Based on SCJ’s promise to voluntarily discontinue the “non-toxic” and “100% natural fragrance” claims, NAD agreed to treat these claims as discontinued and did not review the claims on their merits.

With respect to the remaining “biodegradable” claim, SCJ presented testing that it said showed the dish soap was biodegradable. The challenger asserted that although that evidence may be sufficient to support that claim, the use of “biodegradable” on the product packaging implied that the packaging was also biodegradable, which was not true. In response, SCJ disagreed, noting that no “reasonable consumer” would think that “biodegradable” applied to the soap and the packaging.

On this point NAD agreed with SCJ, to an extent. NAD concluded that although based on the original packaging wording no reasonable consumer would interpret biodegradable as applying to the packaging and the soap, the advertiser’s voluntary discontinuance of the “non-toxic” claim changed the equation, since “biodegradable” had appeared adjacent to “non-toxic.”

However, because the advertiser voluntarily agreed to discontinue the “non-toxic” claim, nothing in close proximity to the “biodegradable” claim limits it to the soap and not the bottle. NAD considered the message reasonably conveyed by use of the claim “biodegradable” on the modified front label of the product and determined that neither the other claims on the front label, nor the fish illustration, were adequate to clearly limit the unqualified “biodegradable” claim.

Based on this conclusion, NAD recommended the “biodegradable” claim be modified to clarify that it only applies to the soap and not the entire product packaging. SCJ said it would comply with the NAD’s recommendations.

Key Takeaways

Interestingly, it was SCJ’s voluntary modification of its claim that led NAD to recommend that the company further modify the claim. For advertisers, the lesson is that the details of the message matter. In this case, the removal of the word “non-toxic” changed the message of the claim so that it was no longer clear whether “biodegradable” applied only to the soap or to the whole package.