Advertising Law

June 02, 2016

Chambers USA Ranks Manatt's Advertising Practice Nationally for Excellence
First Circuit Affirms Ruling Against Jerk.com
Through the FTC's Lens: Potential Eyeglass Rule Violations
"Brain Training" Programs Settle With FTC
Tech Scam Suit Adds Defendants, Additional Charges
Noted and Quoted . . . Lawson Provides Scoop on E-Warranty Amendments for Inside Counsel
Most Read Stories

Chambers USA Ranks Manatt's Advertising Practice Nationally for Excellence

Manatt's Advertising, Marketing and Media practice was once again recognized as one of the nation's leading practices for both advertising litigation and advisory/transactional work in Chambers USA.

In addition to the stellar practice ratings, three of Manatt's advertising lawyers were individually ranked as leading lawyers: Linda Goldstein, Jeffrey Edelstein and Marc Roth.

Chambers stated the advertising team was "notably impressing in matters connected to emerging technologies" and highlighted its strengths in advising on a full range of marketing matters.

First Circuit Affirms Ruling Against Jerk.com

In a victory for the Federal Trade Commission, the First Circuit Court of Appeals affirmed a Commission ruling that website Jerk.com, a self-described reputation management website, ran afoul of Section 5 of the Federal Trade Commission Act by misrepresenting the source of its online profiles and the benefits of membership.

Jerk.com posted profiles of persons for which users could cast a "jerk" or "not-a-jerk" vote. Although Jerk.com maintained that users created the profiles, in reality, the site swiped data and pictures from other social networks to create the majority of the "jerk" profiles and promised that individuals could "manage [their] reputation and resolve disputes" by purchasing a subscription for $30, the FTC said. The agency moved for summary decision and the Commission granted the motion on both counts, finding founder John Fanning personally liable for Jerk's misrepresentations.

The Commission entered an order enjoining the defendants from making certain misrepresentations and imposing monitoring and recordkeeping requirements. Fanning appealed.

While the First Circuit agreed with Fanning that portions of the Commission's order were overbroad, it affirmed the finding of liability as well as the recordkeeping and order acknowledgment provisions.

The appellate panel considered the "overall net impression" of the claim that Jerk.com's profile pages were user-generated, and found the claim to be material and deceptive. For example, the site referenced its "millions" of users, and Jerk.com contained a disclaimer that it could not be held liable for content because it reflected the views of those users. Combined with other statements made throughout the site (describing it as "a vibrant source of user participation and social interaction" with an open invitation to post profiles of other individuals), the court agreed with the Commission that consumers could be misled.

"[E]ven if Jerk.com never expressly represented that its profile pages were created exclusively by users, it never expressly stated how the pages were created," the First Circuit wrote. "Given Jerk.com's emphasis on user-generated content and the lack of information to the contrary, reasonable consumers could conclude other Jerk.com users created their profile pages."

The court similarly affirmed the Commission's holding with regard to the second count. "Two FTC investigators paid the $30 membership fee and never received any communication from Jerk," the panel said, adding that the FTC received numerous complaints to the same effect. "[T]he record is bereft of any evidence that Jerk.com provided even one paid member the opportunity to contest information on a profile page," despite the defendants' promises to the contrary.

The court also said it found no merit in Fanning's objections to the injunction against making any misrepresentations about the "source of any content on a website" and "the benefits of joining any service." The First Amendment does not protect misleading commercial speech, the panel said, and found a "reasonable fit" between the FTC's restriction on the misleading speech and the government interest it served.

Recordkeeping provisions requiring Fanning to "maintain" and "make available" advertisements and promotional materials for a five-year period and notify the Commission of any complaints or inquiries relating to any website or other online service were also reasonably related to the defendants' FTC Act violations, the court determined. Both were tied to "misrepresenting the source of Jerk.com's content and the benefit of its membership subscription," the court wrote, particularly given the ease with which Jerk.com's practices could be transferred to other websites.

However, the First Circuit agreed with Fanning that the compliance monitoring requirement—mandating that he notify the Commission of "his affiliation with any new business or employment" for a period of 10 years—was not reasonably related to his violation. "Fanning must notify the Commission of all business affiliations and employment—regardless of whether or not the affiliate or employer has responsibilities relating to the order," the panel said. While the FTC told the court that it has traditionally required such reporting, the Commission also conceded that the provision would require Fanning to report if he were a waiter in a restaurant.

Affirming the other parts of the order, the First Circuit vacated and remanded the compliance monitoring requirements.

To read the opinion in Fanning v. FTC, click here.

Why it matters: The FTC hailed the First Circuit opinion. "This ruling makes it clear that the defendant's misrepresentations in this case were harmful to consumers," Jessica Rich, Director of the agency's Bureau of Consumer Protection, said in a statement about the decision. "We are pleased with the ruling, and will closely monitor the defendant's compliance with the order, as we do in all our cases." For advertisers, the decision reiterates that the FTC can find deception based on the "overall net impression" presented by a website and not simply express claims.

Through the FTC's Lens: Potential Eyeglass Rule Violations

Warning letters sent by the Federal Trade Commission to 38 prescribers cautioned recipients about potential violations of the agency's Ophthalmic Practice Rules, better known as the Eyeglass Rule.

The Rule requires that prescribers provide their patients with a copy of their eyeglass prescription immediately after an eye exam, even if the patient does not request it, and it prohibits prescribers from requiring that patients purchase eyeglasses as a condition of providing the prescription.

"You should also know that prescribers cannot place a liability waiver on the prescription, require patients to sign a waiver, or require patients to pay additional fees, in exchange for a copy of the prescription," Mary K. Engle, Associate Director of the FTC's Division of Advertising Practices, wrote in the letters. "Prescribers also cannot refuse to perform an eye exam unless the patient purchases ophthalmic goods from the prescriber."

The Rule is intended to allow consumers to comparison shop for eyeglasses, the letters noted. Recipients of the letters—who were not identified by the agency—were the subjects of consumer complaints that their offices failed to provide them with an eyeglass prescription at the end of an eye exam.

To help prescribers comply with the Rule's requirements, the FTC enclosed a copy of the Eyeglass Rule and an agency business guidance publication, Complying with the Eyeglass Rule, with the warning letters.

Violations of the Rule "may result in legal action," Engle cautioned recipients, placing them on notice of civil penalties of up to $16,000 per violation.

To read a sample warning letter to a prescriber, click here.

Why it matters: The agency emphasized that prescribers cannot contract their way around the Rule. While a prescriber can require a patient to pay for the eye exam before giving the patient a copy of the prescription, the immediate payment requirement must apply with equal force to patients whose exams reveal no need for glasses, contact lenses, or other ophthalmic goods. The FTC also noted that many states impose requirements about the content of the prescription itself (such as the date of the exam and when the prescription expires), so prescribers should ensure they are in compliance with both state and federal law.

"Brain Training" Programs Settle With FTC

The defendants behind "Brain Training" programs reached a deal with the Federal Trade Commission this week by agreeing to halt claims for the products and pay the agency $200,000.

LearningRx Franchise Corp. and CEO Dr. Ken Gibson made a host of false and unsubstantiated claims that the company's programs were "clinically proven [and] scientifically measurable" to permanently improve health conditions such as ADHD, autism, dementia, Alzheimer's disease, and concussions, the FTC said, and that use of its programs could substantially improve college admission test scores, school grades, career earnings, and athletic performance.

Some of the claims included: "Doctors had told us there were so many things [a student diagnosed with autism] could never do. Now he's in regular classes, he's reading on grade level, he's doing well in math like never before," "LearningRx brain training is proven to increase IQ by an average of 15 points or more. That means for every dollar spent on brain training, there's a return of $127 over a client's lifetime," and "When a neurologist told me I was in the early stages of Alzheimer's, I was devastated … I got on the phone and called the LearningRx … where I live. Could brain training help me? I'd soon know … Thinking, reading, talking—even making decisions—got faster and easier. My neurologist tested my brain function and said it had jumped from 77.1 to 95.9!"

The defendants, who operated more than 80 LearningRx centers across the country, used direct mail pieces, print and radio ads, a blog, and Facebook and Twitter posts to promote their products, the agency said. Google search ads were also used to target consumers who were conducting searches such as "cure for ADD," "autism cure," and "severe traumatic brain injury cure."

Pursuant to the proposed consent order in Colorado federal court, the defendants are prohibited from claiming that their programs improve performance at work or in athletics, or improve the cognitive function of individuals with age-related or other health conditions unless the claims are not misleading and are substantiated by human clinical testing. Misrepresentations about the existence or results of any tests or studies—or providing others with the means to make prohibited claims—are banned.

Performance, benefit, or efficacy claims about the defendants' programs are also banned absent substantiation, including claims about performance on everyday tasks, increased income, superiority to academic tutoring, and improvement of school grades or scores on standardized academic tests. A $4 million judgment will be suspended upon payment of $200,000.

To view the complaint and proposed stipulated consent order in FTC v. LearningRx Franchise Corp., click here.

Why it matters: "Companies that say they can significantly improve serious health conditions or how your brain functions in everyday situations need to back up those claims with sound science," Jessica Rich, Director of the FTC's Bureau of Consumer Protection, said in a press release about the settlement. "In this case, the defendants couldn't show their training provides the health or other real-world benefits they claimed." The agency acknowledged an "uptick" in FTC actions challenging deceptive claims about cognition, warning companies that "before boarding the brain train, take care to support your claims with solid science."

Tech Scam Suit Adds Defendants, Additional Charges

Expanding an already sizable lawsuit against an allegedly "massive operation" that duped consumers into paying for unnecessary technical support plans and repair services, the Federal Trade Commission added more parties to the list of defendants and claims to the many causes of action.

Last November, together with the Attorneys General of Connecticut and Pennsylvania, the FTC filed suit against multiple defendants who allegedly engaged in a tech scam. The operation began with pop-up ads and telemarketing calls implying that the defendants worked for major technology companies like Apple and Microsoft, the agency said. The next step was getting consumers on the phone and gaining remote access to their computers. At that point, the defendants would convince consumers that the computer was infected with malware or other problems, and then attempt to sell them support plans and repair services costing hundreds or thousands of dollars.

Now the Commission has added three new defendants to the case. Innovazion Research Private Limited, Abhishek Gagneja, and Rishi Gagneja were all part of the "massive operation," the FTC asserted, and played "an integral role" in the enterprise.

The amended complaint also included new charges under the Telemarketing Sales Rule against various subsets of defendants. For example, the FTC said some of the defendants engaged in credit card laundering, while others handled chargebacks and opened bank accounts on behalf of other defendants, despite knowledge that the other parties were engaged in illegal telemarketing practices.

To read the original and amended complaint in FTC v. Click4Support, click here.

Why it matters: A federal court judge in Pennsylvania granted the AGs' and FTC's request to halt the defendants' operations. With the additional defendants, the regulators are now seeking to recover some of the $17 million they said the defendants bilked consumers out of during the course of the scam, as well as a permanent injunction against future violations of the FTC Act, Telemarketing Sales Rule, and Connecticut and Pennsylvania consumer protection laws.

Noted and Quoted . . . Lawson Provides Scoop on E-Warranty Amendments for Inside Counsel

Inside Counsel asked Richard Lawson, partner in Manatt's Consumer Protection practice, to shed light on new e-warranties rules. Specifically, the E-Warranty Act provides manufacturers and sellers "the opportunity to comply with the requirements under the MMWA and related … FTC… rules by making warranty terms available to consumers digitally," he said. The law has been on the books since September, and "the most important provisions relate to the direction Congress gave to the FTC to update their rules implementing disclosure and pre-sale availability of warranties," Lawson adds. Click here to read the full article, "Public Comment Sought by FTC for E-Warranty Amendments."

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