Deborah Platt Majoras, the Chairman of the Federal Trade Commission, warned broadcasters that if they don’t do a better job of screening direct response ads for false claims, the FTC may publicly name them in press releases about enforcement efforts, along with the advertisers themselves.

To date, the FTC has primarily aimed its enforcement efforts at direct response advertisers making false claims. Many such deceptive ads plug weight-loss and other products that claim to cure diseases, such as cancer. At a seminar on the Electronic Retailing Self-Regulation Program (ERSP) recently held in New York, Majoras gave some examples, such as “New Calorie-Busting Slimming Pill Forces You to Lose Weight Without Diet or Exercise,” and “How I lost 41 Pounds in Less than 2 Months Without Dieting.”

Majoras took the helm of the FTC just as the Electronic Retailing Association (ERA), in cooperation with the National Advertising Review Council, implemented ERSP, a self-regulatory program, in response to a growing number of cases against the direct response industry, particularly for weight-loss claims. The effort has been notably successful. Fifteen percent of weight-loss ads qualify as deceptive, down from 50 percent a couple of years ago, according to Majoras.

The ERA’s goals in creating ERSP, according to Manatt, Phelps & Phillips partner and ERA Board member Linda Goldstein, were to boost consumer confidence in the direct response industry, and to identify programs making false claims and quickly pull them off the air. The program is also aimed at reducing regulatory scrutiny of the direct response industry, which just a few years ago was “in a frenzy,” according to Goldstein. The program is designed to facilitate consumer use and marketer compliance, allow confidential challenges, be objectively and independently run, and have teeth—something that previous self-regulation programs lacked.

When ERSP receives a complaint, it reviews the ad to determine whether the substantiation provided for the claims “appears reasonable on its face.” Of the 85 cases closed since September 2004, 77 resulted in advertising being modified or discontinued, and six were referred to the FTC for non-participation and two for compliance. Industry participation in the program has reached 93 percent.

The program has resulted in “substantial progress” in the last 18 months, and broadcasters, such as Discovery, MTV, Lifetime, and ABC, have made major strides in screening ads for false and deceptive claims, Majoras said. She urged media companies who are not taking advantage of the action alerts sent out by the ERA, and who continue to run ads already deemed questionable, to get with the program or face FTC scrutiny. “Under appropriate circumstances we will include the airing [of the] media company’s name in press releases about action taken by the FTC,” Majoras said. “Cooperation of the cable and broadcast media is essential. . . . Their refusal to run programs making false claims will be much more effective than the threat of FTC investigation because it denies the marketer revenues.”

Significance: Majoras did not say that the FTC would actually pursue enforcement efforts against broadcasters for airing ads that make deceptive claims—and it’s not clear that the FTC has the authority to do so. Regardless, the FTC has other weapons it can wield against allegedly recalcitrant broadcasters, including the public airing of their names in press releases about enforcement actions. Majoras made it clear that the FTC would do so in instances in which the agency felt such action was warranted.

back to top

On April 28, 2006, XM Satellite Radio disclosed that the Federal Trade Commission has been investigating its sales and marketing practices, including its rebate program, free trial periods, and email marketing that may violate federal antispam laws.

The disclosure was made in a regulatory filing in which the satellite radio provider said it received letters from the FTC, as well as the Federal Communications Commission, about emissions from the transmitter in one of its radios. XM said it received the FTC letter on April 25, 2006, informing it that the agency was conducting an inquiry into whether XM’s marketing and promotional activities complied with various laws, including the FTC Act, the Telemarketing Sales Rule, the Truth in Lending Act, and the CAN-SPAM Act.

“This letter requests information about a variety of our marketing activities, including free trial periods, rebates, telemarketing activities, billing, and customer complaints,” XM reported in the filing. “We are conducting an internal review of these matters, and anticipate responding to the letter shortly and cooperating fully with this investigation.”

 The company added that it was too early in the process to determine the significance of these matters to its business, consolidated results of operations, or financial position.

XM Chairman Gary Parsons said the company would comply with the FTC’s information request about its marketing practices. XM says it plans to look into the allegations internally as well. “In addition to fully cooperating with the inquiry we have appointed an internal task force to conduct a review,” said XM spokesman Nathaniel Brown.

Significance: The FTC and FCC inquiries create a degree of uncertainty in the company’s future, at least in the short term until the issues are cleared up. The company is relatively new and small, and has yet to turn a profit, and legal and regulatory snafus could affect investor and consumer confidence.

back to top

Two separate cases of telemarketing fraud involving credit cards ended on April 28, 2006, with the conviction of four men in Iowa, and a guilty plea by another in Kentucky.

An Iowa jury convicted the four managers of a telemarketing firm, Gecko Communications, of conspiring to commit telemarketing wire fraud by scamming more than $10 million from almost 50,000 individuals with credit problems. According to the District Attorney, the scam promised a pre-approved credit card for a $220 fee. Some telemarketing scripts used by Gecko said customers would be “eligible” for a card, while others said they would get the card if they paid the fee. In fact, all that victims received was a credit card application.

All four defendants could face prison time. Defendant Zachery Whitehill was also found subject to forfeiture of more than $10 million. Gecko founder Christopher Ekeland pleaded guilty to telemarketing fraud in 2004.

In a separate case in Kentucky, Matthew Hunt pleaded guilty to four felony telemarketing counts in connection with a scam in which victims’ bank account numbers were obtained with fraudulent promises of pre-approved credit cards or government grants in exchange for a fee of $199 to $299. Telemarketing firms in Canada and India were involved in obtaining the bank account numbers. In some cases, victims’ bank accounts were debited without their authorization or under false pretenses. Authorities charged that from November 2003 to August 2005, about $3 million from those victims was processed through a bank account Hunt set up in Kentucky and then sent on to the telemarketers. Hunt was arrested and indicted last December. Each charge carries a possible jail sentence of up to five years, with a maximum sentence of 20 years.

Significance: In addition to civil enforcement efforts by the FTC and state attorneys general, in certain instances in which a scam is particularly egregious or happens to catch the attention of federal or state prosecutors, telemarketing scammers can also face criminal charges, as these cases demonstrate.

back to top

Earlier this month, Berkeley, California-based Grocery Outlet Inc. remodeled its Rocklin store and reopened it as Lucky, reviving a well known California brand that grocery chain Albertson’s Inc. shelved in 1999, a year after buying the Lucky chain.

The name change prompted Grocery Outlet and Albertson’s to sue each other, with each claiming the rights to the Lucky trademark.

The Lucky chain was launched in 1931, with a small Bay Area grocery chain. By the late 1990s, Lucky operated hundreds of stores in California and Nevada. Its 28 Sacramento-area stores had 19.7 percent of the market at the time, making Lucky second only to Raley’s and Bel Air, according to the Market Scope survey by TradeDimensions International Inc. of Stamford, Connecticut.

In 1998, Albertson’s bought American Stores, which had acquired Lucky. In 1999, it converted the Lucky stores to Albertson’s stores in a bid to present a consistent image to customers, according to the company’s then-CEO. Albertson’s has slumped in recent years and recently agreed to be sold in a deal that will carve up the company. When the sale is complete, the Northern California stores will be owned by New York investment firm Cerberus Capital Management.

The Lucky brand stayed dormant until Grocery Outlet decided the name was worth reviving. The discount retailer applied for a trademark that combines the old Lucky logo with Grocery Outlet’s own trademark rainbow. Then it sued for a declaratory ruling that Albertson’s had surrendered the rights to the name. Grocery Outlet’s lawyers said a trademark has been forfeited if it hasn’t been used for three years.

Albertson’s countersued, saying Grocery Outlet is an “impostor” trying to confuse longtime Lucky customers who have transferred their loyalty to Albertson’s. “This is an in-your-face blatant infringement banking on as much confusion as possible to draw Lucky customers into Grocery Outlet’s stores,” Albertson’s said in papers filed in U.S. District Court in San Francisco.

Albertson’s demanded that the Lucky name be stripped from the Rocklin store, a demand rejected by the court. Undaunted, Albertson’s began using the Lucky logo again in its advertising and on its Web site. That prompted Grocery Outlet to seek a court order putting a stop to that. The request is pending in court.

Significance: The case, which is being watched with interest throughout the grocery industry, illustrates the selling power a brand can have, even one that was shelved years ago. Legally, it presents an interesting question over who owns the rights to a defunct—but still powerful—mark.

back to top

University of Oregon law professor Keith Aoki has written a comic book.

It’s not a page turner filled with superheroes or a dark graphic novel, though. Called Bound by Law? and written with two colleagues at Duke University, the book is a user-friendly introduction to copyright law, using Aoki’s drawings to explain to nonlawyers the basics of the law.

Aoki, who says that comics are his first love, earned two art degrees and then moved to New York City, where he drew cartoons for the underground paper East Village Eye. But life as a starving artist grew old, and Aoki decided to switch careers. Now 50, Aoki has taught copyright, intellectual property, and related areas of law since 1993 and is at work on a book about intellectual property and plant genetics.

Bound by Law? tells the story of Akiko, an artist who wants to make a low-budget documentary showing a day in the life of New York City. But instead of villains, Akiko faces a bewildering maze of copyright laws that could spoil her project by forcing her to pay big bucks for the right to show slices of everyday culture, like a street musician playing the song “Pretty Woman” or people in a bar watching a baseball game on television.

Aoki and his colleagues, James Boyle and Jennifer Jenkins of Duke’s Center for the Study of the Public Domain, also address the doctrine of fair use that allows artists to reuse bits of other works, such as fragments of a song or snippets of video, to create something new or to parody what came before.

“We could have written a dry, boring legal article,” Aoki told a local newspaper. “But we wanted to try to do something in a form that would reach other types of people.”

Other types of people include documentary filmmakers who find the aggressive assertion of copyrights has made the process of “clearing rights” an expensive obstacle, as the comic book’s protagonist, Akiko, finds. The comic book deliberately falls short of offering legal advice, but Aoki said the message on fair use is simple: “Use it or lose it.”

It took the trio about a year and a half to write Bound by Law?, an effort that was funded by the Rockefeller Foundation. The idea came up at a legal conference on the effects of intellectual property rights on culture, and it seemed like a perfect fit for Aoki, who is perhaps one of the few people to use his own cartoons to illustrate articles in a Harvard law journal.

“It was very much like shooting a movie on the cheap,” he said of the project. “All we had was time, ink and paper.”

back to top