Stay ADvised: What's New This Week, December 20
In This Issue:
- DSSRC Frowns on DotDotSmile's Earnings Claims
- Vape Co's $50 Mil Goes Up in Smoke to Settle Kids Marketing Suit
- SWIFT Things Come in Fours at NAD
- First and Centennial States Get Set to Join ARL Club
DSSRC Frowns on DotDotSmile's Earnings Claims
Yet another multi-level marketing company, this time a children's' clothing maker, found itself under scrutiny by the advertising industry's self-regulation program over questionable earnings claims. As we know, the Federal Trade Commission (FTC) remains particularly interested in deceptive earnings claims and sent out more than 1,000 Notice of Penalty Offense letters regarding such claims to companies just two months ago.
DotDotSmile (DDS) sells children's clothing online and operates on a multi-level marketing business model. Trouble is, the company and its salesforce members may be disseminating earnings claims that fall short of the Guidance on Earnings Claims for the Direct Selling Industry promulgated in the summer of 2020 by the Direct Selling Self-Regulatory Counsel (DSSRC) together with the Direct Selling Association. The Guidance is based on existing statutes, regulations, and other documents.
DSSRC initiated its inquiry into the company's claims as part of its ongoing independent monitoring of advertising and marketing claims in the direct selling industry. It found that DDS and its salesforce members were making potentially "aggressive" claims that overpromise returns for salesforce members, akin to a full-time job with benefits. DDS, however, has declined to participate in the review process with DSSRC.
DDS messaging promised that: "You can set out and build your dream life … I never thought I was going to be able to buy a home for my family … to let my husband work less, and we can come together as a team and both provide for our families." Follow-on media posts buttress the message. In one, a woman bemoans the loss of her business during COVID-19 and describes how DDS saved her. She writes that she had "no clue that my 'little' dress business would grow enough that I was able to sell my store and work from home." Another calls working with DDS her "career."
DSSRC found the messaging problematic. It noted that "It is misleading for a direct selling company and/or its salesforce members … to make any earnings claims unless [they] have a reasonable basis … and have documentation that substantiates the claim at the time the claim is made." Because DDS did not respond to DSSRC's requests for substantiation, it has referred the company to the FTC and to the California attorney general.
DotDotSmile was among the 1,000 multi-level marketers that received the FTC's Notice of Penalty Offense back in October, putting them on notice that they could be subject to steep fines for making unsubstantiated earnings claims. DSSRC's referral of DDS to the FTC now brings up the question—will they or won't they?
Vape Co's $50 Mil Goes Up in Smoke to Settle Kids Marketing Suit
A now-defunct vaping company alleged to have deliberately marketed its products to minors has agreed to pay the Office of the Massachusetts Attorney General over $50 million to settle the charges following a default judgment against the company. The settlement brings to fruition Attorney General Maura Healey's goal of holding "Eonsmoke accountable for the consequences of its unlawful marketing campaign targeted at underage consumers."
Eonsmoke sold vaping products and e-cigarettes in what the AG's 2019 complaint called "some of the sweetest flavors and highest nicotine concentrated liquids and pods filled with e-liquids on the market," such as "sour gummy," "gummy bear," "donut dream," and "cereal loops." According to the complaint, Eonsmoke marketed its vaping products to minors via a mix of pop culture imagery, cartoons, memes, and social-heavy marketing that relied on hashtags and celebrity influencers to target its young audience. The company sold easy-to-conceal vaping devices disguised to look like USB drives or fitness bands, as well as flavors that would appeal to kids.
Eonsmoke agreed to the settlement after the court entered default judgment when the company failed to respond to the allegations that it was engaged in a "coordinated advertising campaign intentionally targeted at consumers who were not of the minimum legal purchase age to purchase tobacco products." In addition to the monetary penalty and admission of liability resulting from the default judgment, Eonsmoke and its two co-founders are enjoined from marketing any tobacco product in Massachusetts. The outcome for Eonsmoke in Massachusetts echoes a $22.5 million judgment Arizona obtained against the company following default earlier this year.
State authorities aren't the only ones after Eonsmoke. The U.S. Food and Drug Administration (FDA) recently faulted the company for a lack of authorization to market its products. JUUL, the competitor, also sued Eonsmoke for trademark infringement (though Eonsmoke separately filed suit against JUUL alleging the company harmed its business activities).
Even as the outcome of these suits has put pressure on vaping companies to alter their marketing, e-cigarette advertising is not regulated in the same way as traditional tobacco products. Perhaps the outcome of these cases will encourage the federal government to pass such regulation.
SWIFT Things Come in Fours at NAD
The National Advertising Division (NAD) recently closed four SWIFT-fast track cases. SWIFT is an expedited process for review of single well-defined issue advertising cases, and the number of cases accepted by NAD under SWIFT has been rising.
Rotten Olive Oil? Say It Isn't So!
The North American Olive Oil Association (NAOOA) challenged allegedly falsely disparaging claims by the CEO of California-based (and social media darling) olive oil manufacturer Brightland. In her "founders story" and elsewhere, Aishwarya Iyer claimed that research showed that more than 70 percent of American-sold olive oils are "rotten, rancid or adulterated, causing stomach aches or nausea."
NAD determined the matter was appropriate for SWIFT review because it presented the single issue of "the Advertiser's alleged disparagement of other olive oils sold in the US," which would not require review of complex evidence. NAD further determined it had jurisdiction, despite Brightland's argument that the CEO's statements were editorial content and/or subjective opinion.
After Brightland voluntarily discontinued the claim that "70% or more of US olive oils are rotten, rancid, or adulterated," NAD concluded that related claims in the "Founder's Note" and Iyer's comments in several media interviews still conveyed the unsupported and disparaging message that olive oil could cause adverse health effects and recommended they be discontinued.
NAD found that Iyer's statements were advertising seeking to encourage a consumer purchase and were likely to be interpreted as representative of a typical consumer experience. NAD's decision followed the FTC's Guidelines for Endorsements and Testimonials which state that an ad relating to a consumers' experience will likely be interpreted as representative of what consumers will achieve with the product.
War of the Flossers Ends in Victory for P&G
In a more typical SWIFT proceeding, Procter & Gamble (P&G) challenged claims made by Perrigo Company that its "flossers" (plastic pieces with floss stretched across a two-pronged fork) are the "#1 Brand of Flossers." P&G argued the singular #1 claim was misleading because P&G is the undisputed #1 Brand of floss, that consumers would not understand flosser as a category distinct from floss, and that in any case P&G leads in flosser product sales as well.
NAD recommended the claim be discontinued, noting that "#1 Brand" claims must be tied to a recognized product category, and nothing in the record evidenced that "flossers" are a distinct category within the larger category of flosser tools (NAD seemed to accept that dental floss is a category distinct from flosser tools). Instead, NAD determined that the object of the claim could be subject to multiple interpretations.
Regarding the sales data submitted in support for the #1 Brand claim, NAD further concluded that where, as here, the product is sold in large quantities that vary greatly by manufacturer, calculating simple unit sales was the appropriate method rather than using equivalized unit data which "may overstate consumer preference and less accurately reflect the number of times a consumer reaches for a particular product…." Under this metric P&G was the leading brand. Perrigo said it would appeal the decision.
Aspirin Ad Disclosures Should Specify Dosage
Bayer HealthCare challenged a television advertisement by PLx Pharma, a competitor in the aspirin market. Bayer argued that the ad for PLx's Vazalore did not contain a clear and conspicuous enough disclosure about the scope of its gastrointestinal (GI) safety claim.
In a prior proceeding, the parties had addressed the clinical support for various PLx claims relevant to Vazalore 325 mg. NAD accepted the challenge for SWIFT, noting that the only issue was the sufficiency of the disclosure which sought to limit the claim to the 325 mg product. Upon review, NAD recommended that the commercial be modified to clearly and conspicuously disclose in the main claim that Vazalore 325 mg and not Vazalore 81 mg is "clinically shown to cause fewer ulcers than aspirin."
To reach its conclusion, NAD first determined that the commercial communicated a claim for the entire line of products (rather than a claim tied only to the higher dosage product). Although the prior NAD case had found the GI health claim supported, this was only for Vazalore 325 mg dosage and not for the 81 mg dosage product.
NAD was also unpersuaded by PLx's argument that the ad had been approved by the TV network's standard bodies. It nonetheless recommended that PLx modify the commercial. Irate that the case was accepted for SWIFT, unhappy that Bayer apparently commenced a simultaneous compliance proceeding relating to the earlier case, and adamant that PLx was in full compliance with NAD's prior decision, the advertiser indicated it would appeal the decision.
Unlimited Minty Mobile Claims Are Unsupported
AT&T challenged claims by Mint Mobile about its "unlimited" "unltd" and "unliminted" (emphasis added) prepaid 4G LTE and 5G plans, making the case that Mint throttles its data to 2G after the data cap is met, so this claim is misleading. NAD found the "unlimited" and "unltd" claims appropriate for SWIFT review because the single issue was whether the express claim "unlimited" (or unltd) was contradicted by its disclaimer. Not so for the fanciful "unliminted" which NAD, agreeing with the advertiser, determined was an implied claim not appropriate for SWIFT.
NAD recommended Mint discontinue the use of "UNLIMITED" and "UNLTD" headlines in its ads or modify them to communicate that the plan does not offer unlimited high-speed data. The claims were not supported because although Mint provided a disclosure explaining the discrepancy, it contradicted "a message reasonably conveyed by the underlying claim."
Any disclosure that an "unlimited" data plan has caps contradicts the message that the plan is unlimited, said NAD. Mint should discontinue the use of UNLIMITED or modify it to clearly communicate that the plan is not in fact unlimited given throttling once the consumer hits the data cap.
The scope of SWIFT has been expanding, and challengers at NAD would do well to consider how to fit their cases within these truly swift processes, with decisions in under a month rather than the more typical four-six month period for a standard track case.
First and Centennial States Get Set to Join ARL Club
As more businesses turn to automatically renewing contracts, states are increasingly signing into law legislation to protect consumers from problematic cancellation procedures and renewals without notice. Starting on the first day of 2022, businesses operating in Colorado and Delaware will be subject to the states' new automatic renewal laws (ARLs).
The two laws have much in common with each other and with California's strict (and stricter) ARL as they apply to a broad range of consumer contracts.
Though Colorado has an ARL governing health club contracts, its passage of H.B. 1239 in July of last year broadened the state's regulation of auto-renewing contracts significantly. Like most ARLs, the law requires companies to make "clear and conspicuous" disclosures about the cancellation policy, the length of the automatic renewal term, and any minimum purchase obligation.
The law also requires marketers to obtain consent for the terms and reminders, as well as clear procedures for cancellation. The law specifically makes it unlawful to use an online link as the method of informing consumers about the terms of an automatic renewal contract. It penalizes the failure to provide a simple cancellation mechanism and requires notice of material changes and renewals.
Colorado's ARL differs in some ways from those of other states. Its law requires express written consent from consumers for auto-renewing contracts lasting more than one year. It also has specific provisions governing auto renewal contracts for online dating services, including language that dating service companies must include in the contracts specifying that users may cancel the contract and when they may do so. Like California's auto-renewal law, Colorado's provides no private right of action.
S.B. 93 also applies to a broad range of consumer contracts, though with some limitations. Like most ARLs it requires sellers to provide clear and conspicuous notice of the automatically renewing contract, its cancellation provisions and procedures, consent for auto-renewing agreements, reminders, and disclosures.
Unsurprisingly for the business-friendly state, Delaware's law is somewhat less burdensome and more balanced than other ARLs. It does not apply to "goods and services" but only to "merchandise," though that term is defined broadly.
Further, Delaware's law omits rules about free trials, unlike both Colorado and California. The law also sets out a "good faith" defense for businesses accused of violating the law. Delaware's ARL does provide a limited private right of action.
Following the FTC's recent Negative Option Policy Statement, and as the trend towards broad (and stricter) regulation of auto renewing contracts gains further steam, companies should ensure they monitor ARL regulations and tweak their compliance accordingly.