In This Issue
Retailers are worried that a planned European Union law will hurt online sales and impose serious costs on businesses that trade overseas via the Internet.
The proposed regulation, which is slated for vote through the European Parliament next month, will require companies that sell products across borders to deal with customer complaints under the different legal systems of all 27 EU countries.
The Rome I Regulation aims to give an existing 1980 Rome Convention between EU countries a more solid legal basis. However, concern has arisen about new provisions in the Regulation’s Article 5, which introduces the idea that any business-to-consumer contract will fall under the law of the country in which the consumer resides.
The British Retail Consortium and the Confederation of British Industry have written the EU industry commissioner Günter Verheugen, warning that the regulation could prevent businesses, especially smaller ones, from trading in EU markets. They criticized the European Commission for pushing the proposal through without properly assessing its impact. Alisdair Gray, the Consortium’s Brussels director, explained that the Article’s wording meant that businesses selling products to EU consumers would have to undertake a “financially onerous study” of the legal requirements in EU member states.
For example, companies trading abroad would have to go through cumbersome background checks to determine whether they have to register officially in all of the countries to which they sell.
Such fears were criticized by the European consumer rights group BEUC, which said that with 27 different legal systems, consumers might be deterred from buying from abroad if they were not protected.
Significance: The EU’s proposal is not much different from the situation in the United States, where online retailers must abide by the consumer protection laws of the states in which they do business. It’s one of the consequences of the increasingly global retail economy fueled in large part by the Internet.
The Federal Trade Commission is requesting public comments on its Guides Concerning the Use of Endorsements and Testimonials in Advertising.
The Guides are designed to help businesses conform with acceptable endorsement and testimonial advertising practices as required by Section 5 of the FTC Act. They define advertising terms, such as endorsements and testimonials, and contain guidelines associated with the use of endorsements and testimonials to market a product or service. The Commission cautioned that the Guides are advisory only. The FTC retains authority to initiate proceedings to enforce the requirements of Section 5.
In a news release, the FTC asked all interested parties to comment by March 19, 2007, on the costs and benefits of the existing rules and guides, as well as their regulatory and economic impact. In particular, the Commission said it is interested in potential conflict between the guides and state, local, or other federal laws, and how changes in technology or economic conditions have affected the Guides.
The FTC also requested comment on two studies about the messages conveyed by consumer endorsements. In the first report, “ The Effect of Consumer Testimonials and Disclosures of Ad Communication for a Dietary Supplement,” the Commission examined the communication effects of a promotional booklet containing three pages of consumer endorsements for a dietary supplement. The authors of the study suggested “that multiple testimonials about a product effectively communicate efficacy claims, i.e., that the product works for the uses discussed in the testimonials. Testimonials also appear to communicate that the product will work for all, most, or about half of the people who use it. Finally, the study suggests that prominent disclosures in ads containing multiple testimonials may be ineffective in limiting the communication of efficacy and typicality claims. This study used disclosures that were more prominent and stronger than the disclosures typically used in ads containing testimonials.”
The second report, “Effects of Consumer Testimonials in Weight Loss, Dietary Supplement and Business Opportunity Advertisements,” examined the messages conveyed to consumers by one-page print advertisements containing consumer endorsements for a weight-loss program, a cholesterol-lowering dietary supplement, or a business opportunity. Findings indicate that the testimonials used in this study communicated to a substantial percentage of consumers that the advertised products would enable new users to achieve results similar to those portrayed by the testimonialists (i.e., the testimonials communicated product efficacy), and would enable a substantial proportion (half or more) of new users to achieve results similar to those portrayed by the testimonialists (i.e., the testimonials communicated typicality). The FTC wants additional information about any other available research concerning the messages conveyed by consumer testimonials.
The Guides require advertisers to disclose connections between themselves and their endorsers that might materially affect the weight or credibility of the endorsement. The Guides also point out that consumers ordinarily will expect that endorsers who are well known personalities (i.e., celebrities) or experts will be compensated for their endorsements; therefore, an advertiser need not disclose the payment of compensation to such endorsers. A newish twist on endorsements involves celebrity appearances on talk shows and morning news programs in which they discuss ailments that afflict them or people close to them without disclosing that they’ve been paid sizable fees to do so. The FTC is seeking any extrinsic evidence regarding consumer expectations about celebrity endorsements made during an interview.
Significance: Public comments serve as a valuable opportunity to provide input into the FTC’s review process. Although the Guides are advisory in nature, they are an important source of information for marketers and instructive as to the FTC’s stance on the issues they cover.
Federal Trade Commission Chair Deborah Platt Majoras praised the efforts of kid food marketers to voluntarily shift their advertising messages to promote healthier eating habits and provide healthier product options.
She made the remarks in a January 17, 2007, speech at the Association of National Advertisers’ Advertising Law and Business Affairs Conference.
Majoras said she is pleased with self-regulatory actions taken by marketers to encourage healthier eating habits in children by shifting the focus of advertising. “These industry initiatives are commendable,” she said, “and my hope is that they will continue to prompt competition among the food marketers and entertainment companies to use their resources to develop healthier alternatives and to use their creativity to promote effectively those healthier foods to children and youths.”
Majoras also steered clear of linking advertising to rising childhood obesity rates, but she indicated there was still work to be done. “Trim the fat in marketing to kids,” Majoras advised, adding “[t]ake the empty calories—that is, unsupported claims—out of advertising.” Next she asked that the attendees not “succumb to the temptation to spy on consumers.” She also attacked the practice of “buried or fine-print disclosures,” saying they “do not work on computers just as they’ve never worked in more traditional areas of commerce.”
Significance: Majoras’ business-friendly remarks offer reassurance to marketers that the agency will not push for regulation of kid food marketing while she is at the helm. However, the same cannot be expected of a newly elected Democratic Congress, which has had kid food marketing in its sights for some time already.
The Justice Department has subpoenaed Wall Street investment banks as part of a widening probe of the online gambling industry.
The subpoenas were issued to firms that had underwritten the initial public offerings of some of the most popular online gambling sites abroad. The banks involved in the inquiry include Credit Suisse, Deutsche Bank, and Dresdner Kleinwort.
Online gaming sites, like PartyGaming and 888 Holdings, typically based in Costa Rica or Antigua, allow American bettors to use their home and office computers to place wagers on a range of contests. Millions of Americans participate; more than half of all bets placed to major offshore casinos are from residents of the United States. Since the casinos are outside the reach of U.S. prosecutors, they are seeking to prosecute the operations’ American partners, marketing arms, and now, possibly, investors.
The largest U.S. banks, like Goldman Sachs and Citigroup, steered clear of underwriting the London IPOs, in part because of the legal ambiguity of the sites, which are illegal in the United States but still accessible to U.S. residents.
The subpoenas, reported January 17, 2007, by The Sunday Times of London, appeared to be part of an aggressive attack by federal prosecutors on the Internet gambling industry just two weeks before one of its biggest days of the year, the Super Bowl. The prosecutors may be emboldened by a law signed by President Bush last October that explicitly defined the illegality of running an Internet casino. Before the Unlawful Internet Gambling Enforcement Act was adopted, the government said that Internet gambling was illegal under a 1961 law.
The prosecutors’ efforts have already hit offshore casinos hard, most notably with the arrest last year of David Carruthers, the chief executive of an Internet sports book, BetonSports. The company is based in Britain and has operations in Costa Rica, but Mr. Carruthers was detained in the Dallas airport while flying from the U.K. to Costa Rica. The arrest led to BetonSports’ decision to stop taking bets from the United States, crippling its business. Several weeks later, agents of the Port Authority of New York arrested Peter Dicks, the chairman of Sportingbet, which offers online sports betting and, like BetonSports, trades on the London Stock Exchange. Dicks was arrested at Kennedy Airport. Earlier this month, a British online money-transfer business, NETeller, said it would cease handling gambling transactions from U.S. customers after two of its executives were arrested in the U.S. on money-laundering charges.
Significance: The subpoenas to the banks are troubling because investment in a company that is legal and licensed in its jurisdiction has not traditionally been grounds for prosecution. The subpoenas, however, could be part of a government fact-finding effort and might not signal a plan to prosecute banks.
Jackson Hewitt Tax Service Inc., the No. 2 U.S. tax preparer, will pay $5 million to resolve claims that it used deceptive marketing to push high-interest tax refund anticipation loans to low-income people in California.
Of the amount, $4 million is earmarked as restitution to customers who purchased same-day loans called “Money Now!” and other loan products. The company also will pay $500,000 in civil penalties and $500,000 to reimburse investigative costs to resolve a lawsuit filed in Alameda County Superior Court, according to an announcement by California Attorney General Bill Lockyer earlier this month.
Jackson Hewitt was accused of violating state and federal regulations against unfair debt collection and business practices, false advertising, and unauthorized sharing of consumers’ tax information. The company portrayed anticipation loans, some carrying annual interest rates of 200%, as refunds, and falsely told consumers the loans were a quicker way to get money at tax time, Lockyer said.
Refund-anticipation loans are offered to taxpayers expecting a tax refund who don’t want to wait the two weeks to a month the Internal Revenue Service typically takes to send them out. The loans are heavily promoted during the tax-filing season. More than a third of Jackson Hewitt’s clients took out the loans in 2005, according to the company’s annual report.
Significance: Refund-anticipation loans are highly controversial. As reported in the February 28, 2006, issue of AdvertisingLaw@manatt, California sued H&R Block last February over a similar loan program. That case is still pending. The settlement with Jackson Hewitt represents the first resolution of a state action over these programs. There are at least two potential class action cases challenging refund-anticipation loans, and H&R Block recently agreed to pay $101.5 million to settle other class actions.
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Lauren Reiter Brody
Alan M. Brunswick
Gregory A. Clarick
Christopher A. Cole
George A. Cooke
Jennifer N. Deitch
Andrew C. DeVore
R. Bruce Dickson
Jeffrey S. Edelstein
Gene R. Elerding
Linda A. Goldstein
William M. Heberer
Susan E. Hollander
Angela C. Hurdle
Felix H. Kent
Christopher T. Koegel
Charulata B. Pagar
Jill M. Pietrini
Lindsay M. Schoen
Brad W. Seiling
Carly Van Orman
Charles E. Washburn, Jr.
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