Stay ADvised: Brand Protection & Advertising Law News
In This Issue:
- Unlimited Plan, Limited Time? NAD SWIFT Finds Mint Mobile Disclosures Stale and Insufficient
- Federal Court Sides With Neora Against FTC, Making It Harder to Prove MLM Is a Pyramid Scheme
- Court Finds Plaintiffs' Packaging Slack-Fill Deodorant Claims Against Unilever Stink
- Will They Never "Lurn?" FTC Stops Yet Another Deceptive Earnings Scheme
Unlimited Plan, Limited Time? NAD SWIFT Finds Mint Mobile Disclosures Stale and Insufficient
Was Mint Mobile's $15 "Unlimited" plan campaign transparent about its limited time offer?
The National Advertising Division (NAD) weighed in on this question after a challenge by a Mint competitor under the jurisdiction of NAD's Single Well-Defined Issue (SWIFT) track, which provides an expedited process wherein NAD looks at certain "single issue," less complex advertising claims.
Mint's television ad for its "$15/mo. Unlimited" plan featured actor and part Mint owner Ryan Reynolds. In the ad, Reynolds says, "With the price of just about everything inflating these days, you may wonder why Mint is deflating the price of Mint Unlimited from $30 a month to just $15 a month." A small-font disclosure at the bottom of the screen indicating the lower price read: "Promotional rate for first three months," while Reynolds talked.
The challenging competitor argued that the disclosure was neither prominent nor sufficient, suggesting that Mint should include this material disclosure as part of the claim or at least make it equally prominent and in close proximity to the claim.
Mint defended its "now only $15/mo." claim, arguing the statement accurately conveyed the material terms of the offer, which is a limited time service plan after which consumers must choose a new service option. Mint also pointed out that consumers can purchase a 12-month plan which is "always available at $15 a month."
However, NAD disagreed with Mint's reasoning and found the disclosure to be deficient. NAD explained that material conditions in prepaid wireless plans must be disclosed, and Mint failed to do so. The ad did not indicate that the "$15/mo." claim is a promotional offer for three months of reduced-cost service. Instead, the claim reasonably conveyed the message that the $15 a month rate applied to the service going forward. Additionally, the TV commercial didn't communicate the prepaid nature of the service plan.
NAD also found that the "limited time only" disclosure banner did not clearly communicate whether "limited time" was in reference to the duration of the offer or of the service. As a result, reasonable consumers could take away the message that "limited time" referred to the length of time the offer would be available, but that the rate going forward would be $15 a month indefinitely. Finally, the small print disclosure did not properly disclose that the offer was for a limited, three-month period.
NAD recommended that Mint "clearly and conspicuously disclose that the offer is a promotional offer for three months of service as part of the main claim or in similar size text and font in close proximity to the claim."
Key Takeaways
This decision serves as a good roadmap for the types of claims NAD will review in SWIFT. Although in some ways the decision is multifaceted, the single "issue" was the content and sufficiency of the disclosure—a now-classic case for SWIFT.
Federal Court Sides With Neora Against FTC, Making It Harder to Prove MLM Is a Pyramid Scheme
Dealing a blow to the Federal Trade Commission's (FTC) ongoing battle against deceptive practices in the multi-level marketing ("MLM") industry, a federal court in Texas cleared Neora, LLC on all counts in the FTC's lawsuit against the company. The court determined that the FTC failed to show that Neora was involved in an illegal pyramid scheme and thus declined to halt its operations.
The FTC filed its lawsuit against Neora in 2019, alleging violations of Section 5(a) and Section 12 of the FTC Act. Neora is a multi-level marketing company selling popular beauty and wellness products through "Brand Partners" ("BPs"). The Commission contended that Neora falsely projected earnings potentials for its BPs, misrepresented product effectiveness, and thereby ran an illegal pyramid scheme.
The court applied the test established by the FTC in In re Koscot Interplanetary, Inc. to determine what constitutes a pyramid scheme. The Koscot criteria define pyramid schemes by two key characteristics: participants pay the company for: (1) the right to sell a product and (2) the right earn rewards for enrolling others, which are unrelated to actual product sales to end-users. As to the first Koscot element, the court acknowledged that the FTC readily satisfied its burden by showing that Neora BPs pay $20 in exchange for an Enrollment Kit and the right to sell Neora's products.
The court spent most of its analysis on the second Koscot element, the "sine qua non of a pyramid scheme." The question before it: "Did Neora's BPs receive rewards for recruiting other participants, unrelated to the sale of product to ultimate users[?]" The court excluded from its analysis the rewards to "Preferred Customers" ("PCs"), because PCs buy Neora products for personal consumption and not to partake in Neora's business opportunity. The remaining question, then, was whether the other available rewards were "unrelated to the sale of the product to ultimate users so as to make the Neora compensation plan problematic under Koscot."
The FTC relied heavily on expert testimony from Dr. Stacie Bosley. However, the court found her assumption—that BPs are never ultimate users—unsupported by the evidence. The court emphasized that the FTC needed more than just Dr. Bosley's view to argue against counting BP purchases as sales to end-users. The court also felt the FTC had unfairly overlooked significant sales to PCs when evaluating whether recruitment-based rewards were "unrelated" to ultimate users.
The court argued that the FTC failed to provide meaningful evidence that BPs were motivated only by the Neora compensation plan rather than for personal use of popular Neora products. The court noted that this "failure" directly contradicted the FTC's own guidance to consider MLM participants' consumption of the product in determining whether an MLM is a pyramid scheme.
The FTC urged the court to follow its prior decision in Vemma Nutrition Co., which found that there was no way to separate BPs' intent to consume the products as ultimate users from their desire to "remain qualified for bonuses." The court refused to extend Vemma to Neora, because to do so would disregard evidence of the BPs' "self-reported motivations for being a BP." The court suggested that while there was room for arguments against Neora, the FTC missed an opportunity. They could have presented evidence showing that BPs bought products primarily to gain incentives. But FTC "[made] no attempt of its own to unbundle BPs intent to consume Neora products as ultimate users from their motivation to participate in the business opportunity."
Key Takeaways
For direct sellers and MLMs, this decision provides some guidance on ways to avoid pyramid scheme claims. For instance, the court rejected the blanket assumption that BPs are never ultimate end consumers. The decision suggests that simply because a significant number of BPs might not profit from an MLM doesn't render it a pyramid scheme. Some BPs might primarily be product enthusiasts, viewing their investment as a way to access discounted products.
Court Finds Plaintiffs' Packaging Slack-Fill Deodorant Claims Against Unilever Stink
Unilever did not deceive the reasonable consumer about the size of its deodorants, a federal court found in granting summary judgment to the company on various fraud, consumer protection, and false advertising claims against the company.
Four plaintiffs sued Unilever on behalf of themselves and a putative class of California purchasers, alleging that its underarm-deodorant stick packaging was misleading because it had a significant amount of "nonfunctional slack-fill" that, while imperceptible to the average consumer, gave the misleading impression that the product contained more volume than the package size portrayed. They alleged violations of California's consumer protection statutes, the Consumer Legal Remedies Act, False Advertising Law, Unfair Competition Law and other common law claims.
First, in what the court noted was a matter of first impression for the Ninth Circuit, the court found plaintiffs' claims were not preempted. Unilever argued that the Food, Drug, and Cosmetic Act (FDCA) expressly preempted plaintiffs' state law claims. The court first found that, in line with other courts' holdings, the California Fair Packaging and Labeling Act's (CFPLA) slack-fill ban for drugs and cosmetics is preempted, which militated against a per se rule that nonfunctional slack-fill is misleading. The court refused to find, however, that this foreclosed plaintiffs' claims completely because the FDCA does not preempt state laws that allow consumers to sue manufacturers that label or package their products in violation of federal standards. Plaintiffs argued that their state-law claims enforce federal prohibitions on "misleading" packaging. But Unilever insisted that, according to the relevant federal agency, slack-fill in drugs and cosmetics is never misleading, citing to the fact that there were not explicit restrictions on slack-fill in drugs and cosmetics. Congress had authorized the Food and Drug Administration (FDA) to promulgate regulations to prevent nonfunctional slack-fill in packages including food and cosmetics. That the FDA had chosen to set these standards only for food was "no basis to preempt all slack-fill lawsuits," reasoned the court.
Second, turning to the summary judgment motion, having rejected plaintiffs' expert opinion evidence due to problems with methodology and analysis, the court found the remaining evidence of plaintiffs' "own anecdotal accounts of deception" insufficient. The court concluded that "plaintiffs cannot make their case" that a reasonable consumer would be misled in the circumstances.
In reaching this decision, the court found that plaintiffs offered no evidence to bolster their claim that Unilever is an "outlier" in the industry and that its competitors do not resort to the same deceptive practices. Conversely, Unilever introduced "compelling comparative evidence that Unilever's 'Dove and Degree sticks are generally in line with competing products.'"
Neither did plaintiffs refute Unilever's evidence that for the period from 2016 to 2022 "there were zero complaints from California consumers concerning the empty space in the products at issue." Unilever's evidence about the lack of complaints was highly relevant to rebutting a misrepresentation claim, wrote the court. After all, with millions of sales, a "reasonable factfinder might expect more than 'zero' complaints from a consuming public that truly felt deceived."
As a final blow, the court found that plaintiffs had failed to convincingly counter Unilever's expert testimony that any "slack-fill" in the deodorants is a strictly functional issue.
Key Takeaways
This isn't the first action Unilever has faced alleging slack-fill claims on deodorant products. Unilever won its argument for preemption of similar claims related to a different line of deodorants in 2015, in the Southern District of New York in the action entitled, Bimont v. Unilever United States, Inc., Case No. 1:14-cv-07749-JPO. That the Ninth Circuit would not find preemption may have at first seemed a blow to stemming these claims in the future, but the court's decision on summary judgment seems to have defined the strict burden of proof any plaintiffs face in the future.
Will They Never "Lurn?" FTC Stops Yet Another Deceptive Earnings Scheme
The FTC alleged that "business coaching programs" provider Lurn and its principal Anik Singal violated the FTC Act and the Telemarketing Act by making deceptive claims that consumers could make "significant" income with various online businesses. Now the company has agreed to pay $2.5 million (with an additional $12 million suspended) to the FTC to refund affected consumers.
According to the complaint, Lurn claimed that it could teach consumers to make thousands if not millions of dollars regardless of their experience or investment. Instead, it was the company which made $65 million dollars promising to teach consumers how to make six figures with affiliate marketing and customizable mugs. But there was no substance to the claims, said the FTC. Aside from a "handful of anecdotal testimonials" from former customers, the company's representations were false, misleading and unsubstantiated.
Lurn offered several deceptive money-making opportunities. For $1,995, a "$37,710 value," the "Email Startup Incubator" promised to teach consumers how to make substantial income through affiliate marketing with a "5-Step System" to becoming a "Stay-At-Home-Millionaire." Claims that participants could make $1,000 a day were inventions, said the FTC.
The "Kindle Cash Flow University" was another course that promised to teach a "tried, tested and proven step by step system" to make "life changing money." The course purported to teach customers how to make thousands emulating highly rated books to "create their own book" to sell online. "Printable Profits" applied the same template to the mug printing business, with false claims that customers could make thousands a month if just 2% of their designs were successful.
The FTC also alleged that defendants used deceptive tactics to incentivize consumers to spend more money on additional programs, pitching "coaching" services to existing customers that cost as much as $10,000. The telemarketers making these pitches were instructed to ask consumers about their income goals and promise that they could help them achieve those goals no matter what they were.
And as we have now seen a few times, the FTC included in its complaint allegations that Lurn and principal Singal were aware that their actions were illegal from at least October 2021 when they received not one but two Notice of Penalty Offense letters from the FTC regarding deceptive earnings claims and endorsements. Even after receiving the notices, they allegedly continued offering the programs and deceptively marketing them.
Key Takeaways
FTC continues to include violations of its Penalty Offense letters in its complaints—but has yet had to prove a letter-related case to court. So these letters are out there—in the thousands—but remain untested.