Stay ADvised: What's New This Week, November 1
In This Issue:
- Trick or Trap: This Halloween, FTC Went As the Enforcer of Dark Patterns and Deceptive Negative Option Offers
- California Renews Auto-Renewal Law, With Stricter Provisions
- Court Finds Plaintiffs' Pharmacare Elderberry False Ad Claims May Bear Fruit
- Neutrogena's Longtime "#1 Dermatologist Recommended Brand" Claim Discontinued After NARB Upholds NAD
Trick or Trap: This Halloween, FTC Went As the Enforcer of Dark Patterns and Deceptive Negative Option Offers
No, the Federal Trade Commission (FTC) isn't going after Harry Potter's nemesis and his "dark patterns."
The FTC is, however, warning companies that it will ramp up enforcement against dark patterns—when companies "trick or trap consumers into subscription services" online. Its new enforcement policy statement lays out the conduct businesses should steer clear of to avoid FTC enforcement for deceptive negative option marketing, the FTC's least favorite "dark pattern" form of marketing.
More specifically, the FTC's "Enforcement Statement Regarding Negative Option Marketing" largely treads roads the FTC has walked before through enforcement of ROSCA, Section 5 of the FTC Act, and its dotcom disclosure guidance. As with FTC Guidance generally, the Policy Statement is not law—unlike California's new stricter statutory requirements discussed in the article below or the rulemaking on point that the FTC is already engaged in.
It does, however, make very clear that the agency does not believe companies have gone far enough in pointing out that the consumer is signing up for repeat deliveries or payments (including a free trial that converts to ongoing payments for goods or services), obtaining effective consumer consent, or providing consumers with a clear and simple means to cancel.
The Policy Statement lays out the FTC's view clearly and conspicuously, and companies would do well to take heed:
- Disclosures: Unsurprisingly, all material terms regarding payments, deadlines to avoid further charge, and cancellation must be laid out "clearly and conspicuously," meaning in the medium the claims are made (the FTC now says disclosures should be oral and visual for ads that are audio/visual, regardless of whether the offer the advertiser is qualifying is not made both visually and orally), proximate to the main claim (and what that means varies and is laid out in the Policy Statement), and in language, font type and font size easily understandable for and digestible by consumers.
- Informed consent: Companies must obtain a customer's informed consent before making a charge, including acceptance of the negative option separate from other aspects of the transaction. The FTC warns that there must not be anything in the language or layout that interferes with consumers' ability to provide express consent.
- Easy and simple cancellation: It should be as easy for consumers to cancel as it was to sign up or purchase the goods or services in the first place. Marketers should not, when facing cancellation, hang up on customers, place them on hold for unreasonable times, provide false information on how to cancel, try to continuously upsell or persuade the consumer to stay on, and the like.
The FTC said it issued the Guidance to provide direction to the business community on how the FTC interprets existing law regarding negative option contracts, and to "assist the courts in developing the appropriate framework for interpreting and applying the various statutes."
"These principles convey the Commission's current views on the application of relevant statutes and regulations to negative option marketing and, as such, should help marketers in their compliance efforts and better understand how the Commission enforces the law."
There is no doubt there have been many complaints and recent lawsuits challenging negative option offers. In one example, a recent class action lawsuit claims that Life Alert (Help! I've fallen, and I can't get up!) failed to inform plaintiff that the service featured a negative option offer and signed her up for it without her consent, then continued to charge her after cancellation.
That said, in the absence of its 13(b) authority to seek equitable monetary awards after the U.S. Supreme Court decision in AMG Capital Management, the FTC continues to dust off its previously little-used penalty authority and issue aggressive proclamations to prepare the ground for potential rulemaking to keep businesses in line.
California Renews Auto-Renewal Law, With Stricter Provisions
Perhaps channeling the FTC, California just provided consumers a lot more protection from arguably deceptive auto-renewing contracts, as the state has again updated its auto-renewal law.
The new requirements will apply to companies offering subscription-based services to consumers in the state via automatically renewing contracts or continuous service offers entered into online (i.e., an agreement that continues until cancelled by the consumer). The updated statute, which take effect on July 1, 2022, adds stricter renewal notice requirements and will make it easier for consumers to cancel.
The updated law requires that for auto-renewal or continuous service contracts lasting a year or longer, consumers must be given clear and conspicuous notice of the upcoming renewal between 15 and 45 days before the renewal date. For subscriptions with a free gift or free trial lasting for more than 31 days, or a discount period lasting for more than 31 days, a renewal notice must be provided three to 21 days before the end of the applicable period.
If a business would be subject to both renewal notice requirements, it must only comply with the former (i.e., notice given 15 to 45 days before the renewal date). However, an auto-renewal or continuous service offer is exempt from these notice requirements if the consumer entered into the contract offline and the business has not collected or maintained the consumer's email address, phone number, or another means of notifying the consumer electronically. The updated statute also mandates certain disclosures that must be included in a renewal notice provided pursuant to the statute.
The law also makes it easier for California consumers to terminate these contracts. Under the current law, if a consumer enters into an auto-renewal or continuous service contract online, the business must allow the consumer to cancel the contract online.
The updated law further specifies that California consumers who enter into these contracts online must be allowed to cancel "online, at will, without any further steps that obstruct or delay the consumer's ability to terminate the automatic renewal or continuous service immediately." The cancellation mechanism must take the form of either a direct link or an "immediately accessible termination email" provided by the business.
Finally, the bill provides that businesses which require customers to authenticate an account in order to cancel a subscription be given the opportunity to authenticate and terminate even without entering their account information.
These are the first amendments to the law since it was strengthened in 2017. As the changes go into effect next July, businesses subject to the law have some time to update their policies and ensure they are compliant.
As we've seen multiple times on Stay ADvised, automatic renewal offers are often featured in FTC actions against unscrupulous advertisers. The push to further regulate this area—which is both popular due to its convenience and rife with potential for fraud—is part of a national trend, with recent legislation regulating these types of agreements passed in California, Illinois, and Delaware.
Court Finds Plaintiffs' Pharmacare Elderberry False Ad Claims May Bear Fruit
A class action lawsuit alleging that the manufacturer of a "sambucol black elderberry" dietary supplement falsely advertised the product's disease prevention and immune boosting abilities will proceed, after the court ruled plaintiffs' claims are not preempted by the Food and Drug Administration (FDA).
Plaintiffs alleged that Pharmacare USA falsely advertised its line of sambucol black elderberry syrups as "scientifically tested" and "virologist developed," and providing "immunity support" that can cure or prevent diseases. The suit was brought under consumer protection statutes including California's Unfair Competition Law (UCL), False Advertising Law (FAL), and Consumer Legal Remedies Act (CLRA).
In its defense, Pharmacare argued that its assertion that its product "supports the immune system" was a "structure/function" claim permitted by the Food, Drug and Cosmetic Act (FDCA), which preempts plaintiffs' claims. While the court agreed with Pharmacare that "supports the immune system" is a "structure/function" claim, it noted that Pharmacare made several more far-reaching assertions regarding its product's ability to cure and/or prevent disease, which collectively comprised the types of "disease claims" that the FDCA does not permit advertisers to make.
Pharmacare included references to respiratory infections, colds, and COVID-19 in its advertising. For example, the company's homepage stated, "Get that NOT WORRIED ABOUT A 5 HOUR FLIGHT IN THE MIDDLE SEAT kinda feeling," implying that the product could prevent infection from COVID-19. The company's website further promised that "elderberries can empower your immune system by fighting free radicals that damage it." Challenges to these types of implied and express claims, taken in their totality, were not preempted because they implied that the products could prevent, treat or cure disease, said the court.
The court also rejected Pharmacare's implied preemption argument, agreeing that plaintiffs merely sought to hold the company liable for the "standards provided in the FDCA through parallel state law." The company also "failed to articulate" how the claims made by plaintiffs in the complaint conflicted with the Nutrition Labeling and Education Act—the
federal statute the company claimed preempted the claims.
The court further struck down Pharmacare's arguments that plaintiffs hadn't sufficiently pled that they relied on the allegedly false and misleading representations and didn't have standing to sue. Plaintiffs "allege that they viewed the alleged misrepresentations on the products' label, on the defendant's website … [and] on T.V. advertisements … [and that plaintiffs] relied on these misrepresentations when purchasing the products and suffered economic injury" because the ads were false.
While claims that a product "supports the immune system" or "helps you stay … healthy" may be acceptable structure/function claims and would not be preempted by the FDCA, the court looks at the totality of the advertising and labeling and whether they "are either explicitly or implicitly claiming to mitigate or prevent disease" to determine whether claims brought under state law are preempted by the FDCA.
Neutrogena's Longtime "#1 Dermatologist Recommended Brand" Claim Discontinued After NARB Upholds NAD
The National Advertising Review Board (NARB) has upheld a National Advertising Division (NAD) recommendation that Neutrogena discontinue its claim that it is the "#1 Dermatologist Recommended Skincare Brand."
The claim by Johnson & Johnson (J&J) that Neutrogena is the "#1 Dermatologist Recommended Skincare Brand" was challenged at NAD along with several other similar claims. After NAD recommended J&J discontinue the claims, the company appealed to the NARB, but just on this one claim.
As an initial matter, NARB rejected J&J's argument that the challenge should have been rejected on jurisdictional grounds. Specifically, the company argued that NAD should not have heard the challenge because in a 2008 decision it had already addressed a materially similar issue involving the comparable advertising claim "#1 Dermatologist Recommended," and considered "comparable substantiation in support."
NARB noted, as it has before, that jurisdictional issues are NAD's purview, and NARB panels are generally not in a position to review those decisions. Regardless, the panel did note that it agreed with NAD that a review more than a decade old of the powerful doctor recommended survey claim at issue "should not preclude a truth-in-advertising evaluation of a similar claim today given the dynamic nature of the skincare market."
Substantively, the NARB panel found that the "Ipsos" study provided by J&J in support of the claim had several flaws which prevented it from providing adequate support for its claim. More specifically, the panel found a danger of undercounting recommendations by failing to include important targeted skin care categories (such as psoriasis) which might well have favored other manufacturers, including the challenger L'Oréal and its CeraVe brand, while including a few targeted categories, such as acne, where Neutrogena traditionally dominates.
NARB further echoed NAD's concern that the survey allowed double counting recommendations by mixing and matching general (but overlapping) categories as well as just a few targeted skin care categories, without adequate instructions to doctors to record each unique recommendation only once and providing a list of all categories up front.
This case affirms two important principles. (And to give full disclosure, DWT represented L'Oréal at NAD and NARB.) First, Doctor Recommendation Claims are powerful tools and NAD and NARB continue to provide important guidance to advertisers in creating surveys that provide adequate support.
Second, NARB would prefer that participants in the self-regulatory process avoid wasteful briefing and argument regarding jurisdictional issues that NARB will not review, deferring on those matters to NAD.