In This Issue:
Sprint Nextel Communications Inc. has agreed to pay New York City $295,000 to settle a lawsuit accusing the wireless company of deceptive advertising, the city’s Department of Consumer Affairs announced April 18, 2006.
As reported in the August 1, 2005 issue of AdvertisingLaw@manatt, last summer, the Department charged T-Mobile, Sprint, and Nextel with running print ads that promised cell phone deals in which the fine print allegedly contradicted the terms of the deal. The city’s Consumer Protection Law provides for a fine of up to $500 per count, with each count based on the newspaper’s circulation, the number of times an ad ran, or other parameters. The ads involved appeared in The New York Post, Newsday, Daily News, and The New York Times. As reported in the December 19, 2005 issue of AdvertisingLaw@manatt, in December, T-Mobile settled charges for $135,000.
The telecom sector ranks among the nation’s biggest advertisers, with the seven top cell phone providers spending $4.7 billion in 2004.
Since the lawsuit was filed, Sprint and Nextel merged to become Sprint Nextel Communications. As part of the company’s settlement, all of Sprint Nextel’s authorized dealers have to comply with the city’s Consumer Protection Law.
Significance: The Department’s actions against Sprint Nextel and T-Mobile remind advertisers that they must take local consumer protection laws—and the agencies charged with their enforcement—as seriously as their federal and state counterparts.
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Jumpstart Technologies, a San Francisco-based Internet marketing company that offered free movie tickets in exchange for friends’ e-mail addresses, will pay a $900,000 fine to settle charges that it violated federal anti-spam laws, regulators announced April 21, 2006.
The civil settlement was filed March 22 in San Francisco federal court. In addition to the fine, it bans the company from further violations of anti-spam laws, but it does not include an admission of guilt.
The company was accused of violating the CAN SPAM Act, a 2003 law that set strict guidelines for businesses that send commercial e-mail and set penalties for spammers.
Specifically, the Federal Trade Commission charged Jumpstart with disguising commercial e-mail as personal messages and misleading consumers about the terms of its FreeFlixTix promotion. The complaint alleged that Jumpstart, which operates direct marketing campaigns for advertising partners and collects marketing information for sale to third parties, sent mass e-mails promising tickets in exchange for the e-mail addresses of at least five friends. The company then sent multiple e-mails to those friends with deceptive subject lines and headers including personal greetings intended to circumvent spam filters, according to the complaint. The complaint also alleged that some people who wanted to join the promotion were asked to submit credit card information to an advertising partner, and others had to pay a late charge to cancel the offer.
The campaign violated provisions of the CAN SPAM Act that prohibit sending commercial e-mail with false or misleading “from” lines, and require that messages be clearly identified as advertising and clearly inform recipients that they can opt-out of receiving more e-mail.
Significance: According to an FTC lawyer, the case against Jumpstart was based on “a pretty cut and dry case of deception.” Jumpstart’s alleged e-mail campaign was subverting consumers’ legally protected right to block commercial e-mails, because the e-mails looked as if they were coming from friends.
Federal officials are racheting up their investigation of possible payola violations at four major radio companies in a probe that could result in a spate of fines by midsummer.
The Federal Communications Commission sent formal letters of inquiry on April 19, 2006, to Clear Channel, CBS Radio, Entercom Communications, and Citadel Broadcasting. Such letters often include demands for documents and other evidence, typically with a 30-day deadline for companies to respond.
The FCC’s letters, first reported by the Los Angeles Times, suggest that the agency is intensifying its investigation of payola, or the practice of paying for airplay of music. New York Attorney General Eliot Spitzer, who has wrested settlements from Sony BMG and Warner Music Group and initiated a lawsuit against Entercom, last month criticized the federal agency. “Almost a year after payola was exposed in significant detail, the FCC has yet to respond in any meaningful way,” Spitzer said.
Spitzer told The Associated Press that confidential settlement negotiations reported between the FCC and radio companies threatened a “substantial evisceration” of his ongoing probes. Last week’s formal letters from the FCC apparently indicate that any settlement talks have been shelved for now, and a more extensive probe is underway.
“This should put to rest any question about the FCC’s commitment to enforce the law,” said Jonathan Adelstein, a Democratic member of the agency and a longtime advocate of tough action against payola. “Our investigation,” Adelstein continued, “will be a thorough and complete review of the industry’s alleged payola practices.” Fellow Democratic Commissioner Michael Copps issued a statement saying that “pay for play abuses cheat the American people and we need to stop them sooner rather than later.” The FCC’s two Republicans (one seat is vacant), including Chairman Kevin Martin, remained silent.
Significance: It’s unclear whether the FCC issued the letters of inquiry as the next step in an ongoing investigation, as it claims, or in response to criticism from Spitzer. Whatever its motivation, the FCC’s move could represent a turning point in which it renews its investigatory efforts of alleged payola activities, but this time in earnest.
The Postal Rate Commission has launched a classification case to clarify the term “Express Mail Second Day” service in response to a consumer complaint and the U.S. Postal Service’s answer.
The case will study USPS adherence to the terms of the Express Mail service under the agency’s Domestic Mail Classification Schedule, as well as the framework for classifying domestic mail categories and postal services and for setting postal rates and fees.
In a February 18, 2005 complaint, a consumer accused the agency of curtailing its Sunday and holiday delivery for Express Mail Second Day and no longer providing adequate postal services on those days. He also claimed that the USPS inappropriately reduced the delivery area for Saturday and eve of holiday acceptance of mail pieces; established a new type of Express Mail Second Day service without seeking a PRC advisory opinion; and provided misleading or inaccurate information.
The USPS responded on May 5, 2005, saying the complaint should be dismissed, that its actions involving Express Mail have been consistent with its statutory obligations and with the DMCS, and that information provided to customers about Express Mail service is not misleading or inadequate overall. “[S]uch occasional inadvertent errors should not become the subject of commission scrutiny as a result of the complaint,” the USPS said.
The PRC said its proceeding would focus on “how best to clearly state in the DMCS the scope of Second Day Express Mail service that the postal service intends to provide its customers.” Several DMCS provisions call for second day delivery, yet in limited circumstances the USPS admits that it does not expect to provide delivery until the third or fourth day, the PRC said.
The PRC said that “delivery on the third or fourth day is nonetheless second day delivery—mail that would have been delivered on the second calendar day except that Sunday or holiday delivery is not available at that particular destination. This proceeding is an attempt to promptly remedy that inconsistency and harmonize the ‘refund’ section of the Express Mail DMCS language regarding Second Day service with the ‘availability’ section.”
Significance: This is an important clarification for businesses that promise delivery by a certain date, especially with time sensitive material, such as rush jobs and delivery of gift items during the holiday season.
A key Congressional panel has approved a bill to make it easier for phone carriers to offer pay-TV services, but rejected a bid to offer enhanced protection for companies that deliver service over the Internet.
The House Energy and Commerce Committee voted 42-12 on April 26, 2006, to grant so-called national franchising rights to phone companies that will ease their delivery of Web-based TV service. Phone companies are spending billions of dollars to construct fiber networks offering fast Internet connections and cable-like TV service. But they face an expensive and lengthy process to secure franchising licenses in the thousands of local municipalities they aim to serve. They are seeking to bypass the process with national franchising rights.
At the same time, the Committee rejected a proposal to preserve so-called Net Neutrality—the right of any company to deliver services over the Web free of discrimination. A majority of lawmakers, mostly Republicans, said there’s little consensus over the definition of Net Neutrality and that discrimination on the Web is largely a non-issue.
Phone companies lobbied hard for franchising relief while opposing Net Neutrality rules, and the panel vote represents a win for them. Cable operators have objected to parts of the franchising provision while consumer groups and Internet companies have pressed Congress to guarantee Net Neutrality.
Critics of the television-franchising provision complained that the bill would allow phone companies to cherrypick which areas they served while ignoring poor customers. Supporters argued that phone companies need leeway, at least early on, to quickly build out expensive new fiber networks to compete with an entrenched cable industry. Over time, they said, phone companies would expand service to attract more customers, boosting competition and perhaps leading to lower cable prices. Lawmakers have complained for years about fast-rising cable costs.
The fight over Net Neutrality has been even more heated. The debate has intensified in recent months after some phone industry executives said they would like to charge fees to Internet companies in exchange for promises of speedy and reliable connections for customers using their sites. Big phone companies say they need to find new revenue to support costly network upgrades. The concern is that such an approach could thwart the growth of new Internet companies that cannot afford fees, reducing competition and thus hurting the overall economy.
So far, cases of network operators blocking users from certain sites are virtually nonexistent. Phone executives have repeatedly assured lawmakers that they would not block Web users from visiting any legitimate site at the speeds guaranteed by their monthly Internet service.
If the Commerce Committee bill became law, the Federal Communications Commission could still punish network operators if they blocked access to certain Web sites. The House bill raises fines to as high as $500,000. Yet the Committee also included a provision that would bar the FCC from crafting a broad definition of Net Neutrality. The agency would be able to investigate access-blocking disputes on a case-by-case basis, but its authority would be otherwise curtailed. Last year, the FCC adopted loose principles in favor of Net Neutrality and warned network owners not to block access to Web sites.
Significance: The Commerce Committee bill now goes to a vote by the full House, but it’s unclear whether the proposal will become law. The Senate remains sharply divided over Net Neutrality rules. With the November elections coming, lawmakers could run out of time to reach an agreement. We will keep you posted on any further developments.
Settling a lawsuit by the city of Los Angeles and state of California, PepsiCo Inc. has agreed to eliminate labels containing lead on bottled soft drinks imported from Mexico and will pay a $1 million civil penalty, officials announced April 21, 2006.
The lawsuit alleged that the soft-drink maker violated California’s infamous Proposition 65 by failing to warn consumers that the labels contained lead.
California Attorney General Bill Lockyer said Pepsi bottled in Mexico is not supposed to be sold in Southern California, but some businesses bring it here because the soda has a different taste that some Latinos prefer. The labels on some bottles contain up to 45% lead, and the lead can be transferred to hands and then be ingested if a person touches his or her mouth, he said. Additionally, lead could contaminate the inside of bottles during washing for recycling.
Under the settlement, filed in court on April 21, PepsiCo will begin phasing out labels containing lead and will remove existing soda bottled in Mexico from shelves in California. In addition to the $1 million civil penalty, the company could face an additional $4.25 million in penalties if it fails to phase out 95% of the labels with lead within 10 years. PepsiCo also will pay $500,000 to a fund for monitoring whether Mexican Pepsi bottles are coming into California and to other programs on lead abatement in food, and $750,000 to reimburse investigative and attorney costs.
PepsiCo officials said the settlement does not involve any product made in the United States and disputed that anyone was put in danger. “The issue is about labeling, not safety,” the company said in a statement. “The products involved are absolutely safe to drink and comply with all U.S. and Mexican safety standards. California has not asked that any product be recalled.” PepsiCo said the use of the lead inks is a long-standing industry practice. “While analysis by respected laboratories supports our belief that we have complied with Proposition 65, and that no extra labeling is required, we have settled this to avoid years of costly and distracting litigation.”
A Lockyer spokesman said his office is examining whether the issue also involves other soft drink makers.
Significance: This settlement shows just how far the long arm of California’s Proposition 65 can reach. In the case at hand, the offending bottles were not even supposed to be sold in the United States, but were being illegally imported by independent importers. It’s not clear whether this was a practice that Pepsi was aware of or condoned, but the mere presence of the bottles on the shelves of California bodegas sufficed to charge Pepsi with violating the law.
Jeffrey S. Edelstein
Linda A. Goldstein
Alan M. Brunswick
Christopher A. Cole
Jennifer N. Deitch
R. Bruce Dickson
Gene R. Elerding
Michael L. Grazio
William M. Heberer
Susan E. Hollander
Angela C. Hurdle
Felix H. Kent
Christopher T. Koegel
Jill M. Pietrini
Lisa C. Rovinsky
Lindsay M. Schoen
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