In This Issue:
The American Medical Association will revisit backing a government ban on TV ads for new drugs.
At its annual meeting held June 10-14, 2006, the U.S. medical group is asking its members to lobby for federal regulations that would greatly restrict TV drug commercials once drugs are approved by the Food and Drug Administration.
Last year, the AMA stopped short of backing a ban in favor of more study. The now-completed 17-page report suggests that AMA delegates support an unspecified “time interval” between a drug’s approval and the launch of TV advertising for the drug. The study is one of numerous resolutions, reports, and policy statements that the group’s 544-member policymaking House of Delegates will consider.
Drug ad spending has quadrupled to more than $4 billion since 1998, the first year after the FDA loosened drug ad restrictions. Doctors claim the ads interfere with their relationships with patients and contribute to rising healthcare costs because patients usually ask for the latest, most expensive, brand name drug. They say they are frustrated when patients ask about drugs the doctors either know nothing about or have not had time to evaluate.
“[Direct-to-consumer] advertisements for newly approved” prescription drugs should “not be run until physicians have been appropriately educated about the drug,” the proposed resolution reads. “The length of the moratorium may vary from drug to drug depending on various factors, such as the innovative nature of the drug, the severity of the disease that the drug is intended to treat, the availability of alternative therapies and the intensity and timeliness of the education about the drug for physicians who are most likely to prescribe it.”
The drug industry lobby, the Pharmaceutical Research and Manufacturers of America (PhRMA), said it is opposed to any government moratorium on drug ads, and that industry self-regulation is working. Last year, for example, PhRMA approved voluntary guidelines for its member firms that included submitting drug ads to the FDA in advance for screening. The association also said it would add information on potential safety risks to ads and ensure ads are age-appropriate.
Significance: The drug industry has been working hard to stave off government regulation of advertising that is being pushed by consumer advocates and lawmakers alike. Drug marketers should watch closely to see what the AMA does, given its considerable lobbying clout in Washington.
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It has been a busy week at the Federal Trade Commission, with announcements of settlements with business opportunity scammers, a file-sharing website, and an envelope-stuffing scam.
Biz Opportunity Scammers Fined $15 Million. Seven companies and five individuals settled FTC charges that they used telemarketing campaigns and weekend sales seminars in hotels nationwide to scam investors out of millions of dollars.
A $15 million judgment was delivered against the corporate defendants, whose few assets will be seized. Individual fines of the same amount were also levied. The defendants were Internet Marketing Group Inc., OneSetPrice Inc., Louisiana corporation First Choice Terminal Inc., Arizona corporation First Choice Terminal Inc., B&C Ventures Inc., RPM Marketing Group Inc., and National Event Coordinators Inc. Individual defendants were David G. Cutler, Cindy Austen Gannon, Paul D. Bonnallie, Tisa Christiana Spraul, and Michael J. Hatch. These individuals are based in Tennessee, Florida, Louisiana, Arizona, and Nevada, respectively.
The individuals and companies were punished for deceptively marketing and selling business opportunities involving rechargeable, prepaid telephone cards and public access Internet terminals. The FTC alleged that the defendants made false and unsubstantiated earnings claims in their sales seminars and promotional materials. They also misrepresented consumers’ rights to cancel their purchase agreements and receive refunds. Also, the FTC alleged that the defendants failed to give their customers timely, complete, and accurate disclosure statements and earnings claims documents, as required by the law.
On top of all of that, the defendants were charged with illegally calling consumers listed on the national Do Not Call registry.
File-Sharing Website Settles FTC Charges. A website operator who claimed that membership to the site would let users of peer-to-peer file-sharing programs transfer copyrighted materials legally has agreed to settle FTC charges that his claims were false, the agency said on May 25, 2006.
The settlement with Cashier Myricks bars misrepresentations about P2P file-sharing products or services and requires the website operator to disclose the legal risks of downloading copyrighted material without the owner’s permission. The settlement, filed in the U.S. District Court in Los Angeles, also requires the operator to refund more than $15,000 to buyers of memberships.
In September, the FTC charged that Mr. Myricks used his mp3downloadcity.com site to market and sell a tutorial and referral service that promoted the use of P2P file-sharing software to download digital music, movies, and computer games.
Unlike a licensed subscription service, the FTC said, the service did not provide its paying customers a license to download and share the copyrighted material. Instead, for $24.95, consumers were instructed on the use of free P2P file-sharing software provided by others.
The FTC alleged that consumers were lured into becoming members by deceptive claims stating that subscribing to the service made P2P file sharing “100% legal.”
According to the FTC complaint, the customers who used P2P file-sharing programs to download copyrighted material, or who made it available to others, without the copyright owner’s permission were engaged in copyright infringement that could subject them to civil and criminal liability. The court ordered a temporary halt to the claims. The settlement ends the litigation.
Envelope-Stuffing Scam Shut Down. In another announcement on May 25, the FTC said that a civil contempt judgment was entered in the U.S. District Court in Illinois against Mark E. Shelton, a defendant who previously was ordered to stop an envelope-stuffing scam in 2004.
The contempt judgment held that Shelton violated the 2004 court order by continuing to deceptively market and sell envelope-stuffing, work-at-home opportunities to consumers. Under the judgment, Shelton has been held liable for $1.49 million in consumer harm and permanently banned from participating in any work-at-home, employment, business, or investment opportunities.
The FTC also announced the filing of a complaint against four individuals and three companies that operated the Illinois-based envelope-stuffing scheme with Shelton.
Significance: With a steady stream of announced settlements, the FTC is letting it be known that its enforcement arm is on the job, investigating and prosecuting alleged deceptive and misleading marketing practices by a wide assortment of defendants.
California Attorney General Bill Lockyer has filed objections to a San Francisco state court’s ruling that the state cannot require tuna canners to place labels on their products to warn consumers about mercury levels. In the objection, Lockyer asked the court to stop publication of the order and reverse the ruling.
The lawsuit—filed by Lockyer under California’s notorious Proposition 65—claimed that methylmercury found in tuna can cause reproductive harm and cancer. Proposition 65, which California residents approved in 1986, requires warning labels on products containing chemicals that have been shown to cause cancer or birth defects.
As reported in the May 31, 2006, issue of AdvertisingLaw@manatt, Judge Robert Dondero ruled that the level of mercury in tuna is below state limits and that it occurs naturally in canned tuna, which exempts it from state warnings. FDA consumption recommendations and federal law already provide adequate protection for consumers, Dondero wrote.
Lockyer spokesperson Tom Dresslar said of the court objections, “Dondero relied on an obsolete, 20-year-old study of rats, as opposed to more current studies of humans presented by the state.”
Significance: The ruling is a win for food and other marketers concerned about liability for trace levels of potentially carcinogenic chemicals that may occur naturally in food. At the same time, there’s no guarantee that the ruling will hold up on appeal. On another front, a Congressional bill named the National Uniformity for Food Act, previously passed in the House of Representatives by a wide bipartisan margin and introduced in the Senate on May 25, could moot Proposition 65, to the extent it is applied to food products. The bill would mandate the kind of uniform national food safety labeling that now provides nutrition and allergy information. California’s three most senior politicians—Democratic Senators Barbara Boxer and Diane Feinstein, and Republican Governor Arnold Schwarzenegger—are opposed to the legislation.
The one-time “fourth worst spammer in the world” has settled lawsuits with the state of Texas and Microsoft Corporation.
Ryan Pitylak, 24, who graduated from the University of Texas last month, has admitted sending 25 million e-mails every day at the height of his spamming operation in 2004.
At one time, Pitylak was listed as the fourth worst spammer in the world by the Spamhaus Project, a London-based international clearinghouse that tracks spammers and works closely with law enforcement officials.
In 1997, Pitylak was 14 and living in Ann Arbor, Michigan, when he created what appears to have been his first Internet marketing scheme. His e-mail pitch, for a company he called Gates Computer Systems, offered advertisers the chance to buy ads on a website for $79 per month.
By 2002, Pitylak had expanded his business—under a company called PayPerAction LLC, he registered more than 200 other aliases for the company with the Texas Secretary of State. The companies, with names such as National Insurance Exchange, Freedom Quote, and Mortgage Rate Network, typically offer “5 free health insurance quotes” or “incredible 3.51% mortgage rates.” Clicking on the link in a message produces a form asking for information such as name, address, and household income. Completed forms were sold to agents of legitimate companies for $3 to $7 for each referral.
Both civil settlements were reached last month in federal court. As part of the settlement with Microsoft, Pitylak promised never again to send out false, misleading, or unsolicited commercial e-mails. Pitylak, who plans to help Internet companies fight spam, said he would sell his $430,000 house and a 2005 BMW to help pay his fines and legal bills.
Pitylak says he is not motivated by money in switching gears from spammer extraordinaire to anti-spam expert for hire. Rather, Pitylak says, “Over time I have come to see how I was wrong to think of spam as just a game of cat and mouse with corporate email administrators. I now understand why so much effort is put into stopping it. The settlements with Microsoft and the Attorney General’s office have been a serious reality check: harsh, but good, and in the public’s best interest.”
Significance: The ranks of Internet outlaws—hackers, spyware purveyors, and spammers—gone legit continue to grow as more and more are found and shut down. It is ironic, but inevitable, that many of them are now making a living fighting an industry they helped create.
A federal lawsuit charges that Dotster, one of the largest domain name registrars, has illegally participated in a massive cybersquatting campaign targeting companies such as Cingular Wireless, Disney, Ikea, Google, Neiman Marcus, Playboy, and Verizon.
The lawsuit, filed June 1, 2006, by retailers Neiman Marcus and Bergdorf Goodman, alleges that Dotster abused its status as a registrar by “checking out” hundreds of domain names that closely resemble the correct ones—and then keeping only the ones that were visited by Web users who couldn’t spell very well. It would then allegedly sell advertising on the site to the companies’ rivals.
Cybersquatting, the practice of registering domain names that may violate a company’s trademark, is hardly new. Also called typosquatting, it has led to high-profile disputes, such as Apple Computer’s successful bid to claim iTunes.co.uk.
But the Dotster lawsuit involves allegations of a new twist on the concept: a registrar using its special status with the Internet Corporation for Assigned Names and Numbers to secure misspelled domains temporarily for a few days, measure the traffic, and then pay for only the ones that would be lucrative in terms of advertising.
The 155-page complaint includes excerpts from an e-mail exchange between a Dotster employee and prospective purchaser. The employee allegedly asked for $1,000 for the name BergmanGoodman.com. “It gets a good amount of traffic right now, and would be a great domain to brand,” said a purported e-mail message. The unnamed purchaser replied: “$1,000? Really? Would you take $500 for it, paid through Paypal?” according to the e-mail exchange. The employee eventually agreed to sell it for $800, according to the alleged exchange.
The lawsuit charges that Dotster violated federal laws against trademark infringement and dilution, federal cybersquatting laws, and Washington state consumer protection laws against deceptive acts and practices.
Significance: While other registrars have been accused of this practice, this appears to be the first dispute with a registrar that has resulted in a lawsuit.
There’s no consumer demographic too small or complaint too minor to merit a swift slap of the offending hand from the U.K.’s Advertising Standards Authority.
National Express breached U.K. advertising rules by incorrectly claiming that passengers could take surfboards on their bus coaches, the industry watchdog ruled May 31, 2006.
A passenger complained to the ASA after a driver refused to let his board on after he had pre-booked a ticket. He had phoned National Express, who told him that surfboards were allowed only at the drivers’ discretion.
However, a voice-over on the radio commercial said: “Get onboard National Express to Newquay for a weekend’s surfing action or whatever else turns you on. There’s loads of room for you and your board.”
The ad breached radio advertising rules because it was misleading, the ASA said. It told the coach company not to broadcast the ad again unless passengers were permitted to travel with their surfboards. The ASA ruled that “at the time it was broadcast the ad incorrectly claimed that passengers could travel with their surfboards.”
National Express apologized for the error and for any inconvenience caused to the surfer who lodged the complaint. The company said its new rules about carrying surfboards hadn’t been officially passed on to their drivers. It agreed to refund the cost of the surfer’s alternative travel arrangements and offered him four free National Express tickets to the destination of his choice.
Jeffrey S. Edelstein
Linda A. Goldstein
Alan M. Brunswick
Christopher A. Cole
Jennifer N. Deitch
R. Bruce Dickson
Gene R. Elerding
William M. Heberer
Susan E. Hollander
Angela C. Hurdle
Felix H. Kent
Christopher T. Koegel
Jill M. Pietrini
Lindsay M. Schoen
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