Stay ADvised: What's New This Week, July 27
In This Issue:
- If You Think It's Oprah (or Ellen or Sandra), but It's Not…
- Harley Davidson Revs Up to Fight False Ad Class Action Back in Fed Court
- Court: Defendant's "Fogger" Advertisements Were Sufficiently Clear
- This Article Was Written By a Human (…Or Was It?): FTC Sends Congress Its Report on Bots and False Advertising
If You Think It's Oprah (or Ellen or Sandra), but It's Not…
A newly filed class action lawsuit accuses a string of cosmetics companies of colluding to use fake celebrity endorsements and deceptive "free" trials to misappropriate millions of dollars from consumers.
According to the complaint, defendants represented that they offered a "free trial" for a beauty product called "La Pura," which customers could purchase for just the cost of shipping. Instead, the defendants allegedly charged customers considerable and unauthorized sums by luring unwitting consumers through fake landing pages containing equally fake celebrity endorsements and text messages impersonating trusted companies.
The complaint describes a pervasive scheme operated in the manner of a "sales funnel" that plaintiffs claim is typical of the free trial scams about which the Federal Trade Commission and Better Business Bureau have issued repeated warnings to consumers. First, "the marketers created 'free trial' landing pages that masqueraded as legitimate news and entertainment websites, often promoting fabricated celebrity endorsements by the likes of Oprah, Ellen DeGeneres, and Sandra Bullock."
Next, fulfillment companies allegedly "assist the marketers/branders with affiliate marketing and advertising, distribute the products to unwitting consumers nationwide, and handle returns when customers complain." The "scammers" allegedly use CRM software providers specializing in creating the deceptive sites, and affiliate marketers and credit card processors that help them avoid detection by banks.
The complaint alleges that plaintiff LeAnne Tan was lured into the deceptive free trial scheme via a text message impersonating Amazon, which led her to a free trial offer for the enticing beauty product "La Pura," available for just the $4.94 cost of shipping. After agreeing to the offer and providing her credit card information, Tan was allegedly charged more than $150 for three separate products via three separate charges. Only after significant and time-consuming haggling was she able to obtain a 70 percent refund for the charges, avers the complaint.
The complaint also alleges violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and California's Consumer Legal Remedies Act (CLRA), False Advertising Law (FAL), Automatic Renewal Law, Sherman Food, Drug, & Cosmetic Law, and Unfair Competition Law.
Will virtual influencers be the next focus of the class action bar? The class action bar is certainly cued in to the importance of celebrity endorsements to consumers. This and other class actions follow complaints from the alleged celebrity endorsers themselves hoping to stem the tide of fake testimonials; last year, Ellen DeGeneres and Sandra Bullock sued 100 anonymous entities for impersonating them to promote beauty products online via deceptive free trials.
Harley Davidson Revs Up to Fight False Ad Class Action Back in Fed Court
Harley Davidson succeeded in its bid to keep a putative advertising class action out of state court. The 9th Circuit agreed with Harley's petition that the punitive damages sought by the would-be class could be included in the amount in controversy for removal purposes.
The complaint, originally filed in 2019 in California state court, alleges that Harley Davidson failed to disclose in ads that the advertised price of its motorcycles included a dealership fee that, although reimbursed to the dealer by Harley, was also separately paid by the consumer as a "set up" fee on top of the purchase price. The putative lead plaintiff says he purchased a Harley Davidson motorcycle in 2015 after seeing ads that stated that the price "exclude[d] dealer setup, taxes, title and licensing," which he said led him to expect that although the dealership would charge him an extra setup fee of $1,399, which he paid, the advertised price was truthful and not inflated by the fee consumers in essence paid twice. The resulting class action alleged false advertising, violation of the Consumer Legal Remedies Act (CLRA), and other causes of action.
Harley Davidson removed the action to federal court in Los Angeles, arguing in part that the action met the Class Action Fairness Act's $5 million amount-in-controversy requirement because the requested punitive damages, aggregated for the class, might reasonably bring the matter over the jurisdictional minimum. U.S. District Judge R. Gary Klausner disagreed and ordered the case remanded, but the 9th Circuit reversed, finding Harley Davidson met its burden to show "that the punitive damages amount is reasonably possible."
In reversing the lower court's decision, the 9th Circuit panel looked to punitive damages awarded by juries in four prior cases. The 9th Circuit allowed a 1:1 ratio of compensatory to punitive damages, reasoning that because the ratios were greater in prior cases, defendants "relied on a reasonable chain of logic" to assume that a similar amount was at stake here and "presented sufficient evidence to establish that the amount in controversy exceeds $5 million." The court noted that Harley Davidson's burden ended with establishing such a reasonable logical chain; defendants removing under CAFA are not obligated to show "the likelihood of the plaintiff prevailing on the punitive damages claim, rather than merely establishing the potential amount at stake;" doing so, as the district court had done, "effectively changed CAFA's amount-in-controversy requirement from possible liability to probable liability."
Defendants looking to remove under CAFA should be sure to account for punitive damages in their amount-in-controversy calculations, but they need not worry about proving the plaintiff's case to do so. Defendants need only find sufficient evidence in potentially similar cases to make the argument plausible.
Court: Defendant's "Fogger" Advertisements Were Sufficiently Clear
Piercing the fog, a Delaware court rejected a plaintiff's Lanham Act claims that a collaborator-turned-competitor made false claims in advertisements for its disinfectant fogging device. The Court granted summary judgment for defendant on the grounds that plaintiff had failed to show that the challenged advertisements were "literally false" under the Lanham Act.
In friendlier times, plaintiff Halosil International and defendant Eco-Evolutions had worked together under the terms of a reseller agreement to market and sell plaintiff's disinfectant fogging device – a portable machine that releases disinfectant solution into the air to disinfect rooms such as operating rooms or laboratories. But the parties' working relationship deteriorated after Eco-Evolutions exited the relationship and started marketing what looked to Halosil like a competing product, marketed using false and misleading claims.
Initially, Halosil sued Eco-Evolutions for false advertising and breach of contract (which the court determined was time barred). At the heart of the false advertising claim was the question of whether statements made by Eco-Evolutions regarding independent certification for its fogger were literally false under the Lanham Act, which prohibits false or misleading statements about a product. Halosil brought its action alleging literal (as distinct from implied) falsity, which avoids the need for showing consumers were actually misled.
Halosil's complaint alleged that Eco-Evolutions falsely advertised in its promotional brochure that (i) its "CURIS System" fogger was registered and approved by the Environmental Protection Agency (EPA), and (ii) Halosil's own fogger device was not validated by the EPA to the same standard of effectiveness. In deciding against Halosil, the court found that no reasonable jury could conclude the statements were literally false. Under the law, literal falsity requires examination by the Court of "[first] whether the claim conveys an unambiguous message and second whether that unambiguous message is false."
In granting summary judgement to Eco-Evolutions, the Court ruled that plaintiff Halosil did not meet its burden. Halosil had asserted that two of Eco-Evolution's statements that the CURIS System were "validated" to kill spores were false because the EPA did not validate Eco-Evolutions' fogger for these capabilities. The Court disagreed, noting that "there is nothing about the context of these claims that would create such an implication." The Court was persuaded by defendant's explanation that a third-party testing company had validated the device and that nothing required this validation to have come from the EPA. "The brochure does not mention any federal agency or regulatory approval. Thus, no reasonable jury could conclude Defendants falsely advertised that their own product had been validated by the EPA."
Finally, the Court was unmoved by Halosil's argument that the statements that the CURIS System is the "Only System Validated to Kill" spores "in a 3 Part Soil Load" were literally false because they imply that Halosil's fogger is not also validated to kill the advertised virus load. Upon reviewing the evidence submitted by Halosil, the Court found that while Halosil's device was registered by the EPA, Halosil had not included any evidence that indicated its product's effectiveness "in a 3 part soil load," and thus it had failed to demonstrate that the defendant's statements were literally false.
What emerges here is a reminder of just how tough it can be for plaintiffs to prove literal falsity under Section 43 of the Lanham Act. As this Court here noted, where literal falsity is alleged which cannot rely on consumer takeaway, not only must the message be false but it must be the only possible takeaway, no ambiguity allowed.
This Article Was Written By a Human (…Or Was It?): FTC Sends Congress Its Report on Bots and False Advertising
Online trolls and bots are the talk of the town these days, whether implicated in election interference or the spread of misinformation online. Now, Congress has received some insight from the Federal Trade Commission (FTC) on the use of "automated computer software" in social media and deceptive advertising practices and on the commission's power (or lack thereof) to enforce the malicious use of bots-released report on bots in social media and false advertising, requested especially by the Senate Committee on Appropriations in December 2019.
The FTC's report found that bots are used in 37 percent of all internet traffic, though the bad reputation bots get is not the whole story. Bots are automated computer software that "can be used on social media platforms to do various useful and malicious tasks while simulating human behavior." As with any tool, bots can be used for nefarious purposes as well as innocent ones, including to facilitate false advertising practices, as well as to fraudulently inflate an influencer's popularity. At the extreme end of the spectrum, malicious bots spread harassment, hate speech, and malware.
That's where the FTC comes in and where the meat of the report lies. The FTC may apply its "clear but flexible mandate, as the nation's consumer protection agency, to protect people from deceptive and unfair practices in the marketplace" through enforcement actions. What that means is that the FTC may pursue enforcement actions where the use of bots is illegal under its Section 5 authority to pursue "unfair or deceptive" trade practices:
"Under the FTC Act, a claim is deceptive if it is likely to mislead consumers acting reasonably in the circumstances, to their detriment. A practice is unfair if it causes or is likely to cause substantial consumer injury that consumers cannot reasonably avoid and which is not outweighed by benefits to consumers or competition."
On the other side of the coin, the FTC noted that this standard also constrains the agency because, in order to pursue malicious social media bots, it must "show in any given case that the use of such bots constitutes a deceptive or unfair practice in or affecting commerce."
The most recent and important FTC enforcement action in this area—and one that the report heavily highlights—is the FTC's settlement with Devumi, the agency's first-ever case against a company accused of selling fake social media followers. These social media "followers" boosted the social media status of various celebrities, athletes, and motivational speakers, but, as it turns out, they were automated bots. The FTC's complaint alleged that the company violated the FTC Act by providing customers with the "means and instrumentalities" to engage in deceptive practices.
Bots are here to stay, so we may as well figure out how to use them for good and stay vigilant against the bad. The report noted they are widely used for important commercial purposes, including providing improved customer service or alerting the public about emergencies.