Suit Over Block Voting on Reviews Moves Forward
A Lanham Act suit brought by a competitor over a company's efforts to minimize negative consumer reviews will move forward, a Utah federal court judge has ruled.
Vitamins Online sued NatureWise, a competing manufacturer of dietary supplements that contain an extract of garcinia cambogia and an extract of green coffee. Both companies sell their products on Amazon, where the site lists reviews using a complex algorithm that takes into account the helpfulness of the review based on voting by users of the site.
According to Vitamins Online, NatureWise had a practice of having its employees vote that positive reviews of its products were helpful and negative reviews were unhelpful, which increased the likelihood that potential customers would see positive reviews of its products first and negative reviews last. NatureWise also encouraged its customers to post or repost their positive reviews on Amazon by offering free products or gift cards, the plaintiff alleged, in the hopes of increasing the position of their products in search results.
NatureWise moved for summary judgment, arguing that its actions did not qualify as false advertising under the Lanham Act because it did not make any false and misleading statements in commerce and it did not "misrepresent" the nature, characteristics, or qualities of its products.
U.S. District Court Judge Dale A. Kimball disagreed. She rejected NatureWise's argument that instructing employees to engage in block voting did not constitute a statement in commerce.
"[T]o fall within the text of the Lanham Act, a defendant does not need to make a statement but only needs to use a statement or other form of conduct specific in the Act," the court said. "[E]ither form of conduct performed by NatureWise could qualify as the use of a device in commerce as described by Section 43(a)(1) of the Lanham Act. By offering free products in exchange for the posting of positive reviews on its Amazon product pages, NatureWise was using a mechanism for the special purpose of increasing the number of positive reviews for its products. Similarly, NatureWise used a mechanism provided by Amazon for customers to rate the helpfulness of reviews for the special purpose of increasing the visibility of positive reviews and decreasing the visibility of negative reviews."
The court considered whether the conduct had the effect of "misrepresent[ing]" the nature, characteristics, or qualities of the defendant's goods or commercial activities.
Judge Kimball answered in the affirmative for the block voting, but sided with the defendant with regard to the incentives to repost positive reviews, as the plaintiff failed to demonstrate that the incentivized reviews were counter to the actual experience of the customers.
"Vitamins Online has not shown that the reviews posted by the customers were not genuine," the court wrote. "In other words, although the free products encouraged the customers to post their reviews on Amazon, Vitamins Online has not shown that the free products were used to encourage the customers to post false or misleading reviews on Amazon."
The block voting remained a problem, however. "Amazon provides a platform for customers to review NatureWise's products and to vote on others' reviews of NatureWise's products," the judge said. "Potential customers turn to those reviews to assess customers' reactions to the product and to assist them in their purchasing decisions. By having its employees use the device provided by Amazon to block vote on the helpfulness of Amazon reviews, NatureWise may be misleading potential customers into believing that a certain number of customers found a review to be helpful when, in reality, NatureWise employees made up a block of those votes."
Judge Kimball granted summary judgment for NatureWise with respect to the claim based on the offering of free products but denied the motion on the block voting claim.
To read the memorandum decision and order in Vitamins Online, Inc. v. HeartWise, Inc., click here.
Why it matters: The court noted that both the Lanham Act itself and judicial interpretations of the statute have expanded over the years. "Although it is unlikely that Congress was contemplating the type of false advertising described in this case when it wrote and amended Section 43(a) of the Lanham Act, the broad language in the Act is sufficient to cover novel methods of false advertising such as this," Judge Kimball wrote. "The broad language of Section 43(a) of the Lanham Act should serve as a warning to online retailers that they should leave customer reviews to customers."
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FTC Disconnects B2B Directory Scam
The Federal Trade Commission has put an alleged business directory scammer out of business by obtaining a default judgment against Construct Data Publishers and a stipulated final judgment and permanent injunction against two of its executives.
Filed in 2013, the agency's complaint alleged that the defendants used direct mail to target small businesses including retailers, home-based businesses, local associations, nonprofits, and others into believing that they had a preexisting relationship with the defendants. The mailing would reference a trade show or exhibition and was designed to appear as if it were simply requesting that the recipient update and verify the accuracy of its contact information.
However, "buried in fine print at the bottom of the form" was a statement obligating the recipient to pay $1,717 on an annual basis to be listed on the defendant's business-to-business directory website. Only long after the 10-day cancellation period had expired would the defendants send an invoice demanding payment, the FTC said. Businesses that did not pay would receive late payment notices, sometimes with late fees added.
The defendants took in millions of dollars with the scam, the FTC alleged, which prompted the FTC to file a criminal indictment against one of the executives for mail fraud. After the Slovakia-based defendants filed for bankruptcy protection in their home country, they reached a deal with the Commission.
Pursuant to the final orders, the defendants are banned from the business directory business. In addition, they are prohibited from misrepresenting any product or service, from attempting to collect payment for their business directory listings, from profiting from consumers' personal information, or from maintaining any consumers' personal information.
The Illinois federal court order against Construct Data Publishers includes a $7 million default judgment (with a transfer of $344,000 from the court's registry), while the order against the executives has a total judgment of $6.6 million, suspended upon payment of $200,000.
To read the stipulated order and the default judgment in FTC v. Construct Data Publishers, click here.
Why it matters: It took three years of litigation, a related criminal case against one of the executive defendants, and a bankruptcy filing in Slovakia, but the FTC finally obtained a court order banning the defendants from the industry and recovering some of the money obtained as part of the scam.
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NAD Takes on "Natural" Deodorant Claims in Spite of Jurisdictional Challenge
The maker of Tom's of Maine antiperspirants and deodorants plans to appeal to the National Advertising Review Board after the National Advertising Division recommended it discontinue "Natural" claims.
Competitor Unilever challenged The Colgate Palmolive Company's express claims for the Tom's "Naturally Dry" line including "It really works. Naturally." and that the ingredients in the products "meet our stewardship model for safe, effective, and natural."
To qualify as an antiperspirant under the Food and Drug Administration's definition, products must contain one of several aluminum salt-based active ingredients for wetness control, Unilever argued, and the aluminum chlorohydrate used in the advertiser's Naturally Dry line is not natural but commercially manufactured by reacting aluminum ingots with hydrochloric acid under controlled conditions.
Before reaching the merits of the dispute, Tom's of Maine argued that the NAD lacked jurisdiction over the action because a court order was in place resolving a consumer class action on identical claims that were subject to ongoing court supervision.
In that case, the company agreed to pay $4.5 million to plaintiffs who alleged Tom's ran afoul of multiple state consumer protection laws and warranty statutes by using the term "natural" for various personal care products, including deodorant.
NAD Rule Section 2.2(B)(i)(b) provides that the self-regulatory body should administratively close a proceeding where the advertising claims are "the subject of pending litigation or an order by a court." Tom's noted that it changed its labeling and advertising as a result of the litigation and that a Florida federal court entered an order granting final approval of the settlement agreement.
But the settlement order "does not address the claims at issue in the litigation and does not make specific findings as to the claims challenged by Unilever," the NAD wrote. The judge did not evaluate the evidence and the truthfulness of the advertising claims. Instead he balanced the costs and risks of litigation for a determination as to whether the deal on the table was fair.
The NAD "Procedures preclude jurisdiction when the challenged claims are subject to a court order, not when litigation has challenged certain claims and the litigation is resolved through a settlement agreement even if the settlement agreement is subsequently ordered by the court," the NAD said.
Having established jurisdiction, the NAD turned to the claims at issue. Tom's argued that the use of the "natural" language was truthful, accurate, and not misleading to consumers. The company uses recycled aluminum wire to source the aluminum chlorohydrate used as their active ingredient in the Naturally Dry line, the advertiser said, and Tom's stewardship model includes a definition of "natural" that reflects this fact. Consumers are told exactly what the advertiser means by the term "natural" on the company's website. The product packaging also refers the customer to the site for more details.
Noting that Tom's is the only company that markets an antiperspirant as "natural," the NAD found the claim to be unsubstantiated as the active ingredient in the product—aluminum chlorohydrate—is not natural. "When the active ingredient (here the ingredient that provides the dryness) is not natural, but extensively chemically processed, consumers can be misled particularly where, as here, the product states that natural ingredients are responsible for the product's effectiveness."
The NAD was not persuaded that the possibility of misimpression was cured by the statement on product packaging directing consumers to the company's website for its definition of "natural" and information about its stewardship model. "NAD has routinely held that the consumers should not have to search to learn more about the limitations on an advertising claim," according to the decision. "If a claim needs to be qualified to prevent it from being misleading, any disclosure should be clear and conspicuous and found within the four corners of the advertising in which the claim appears."
Further, there is no evidence in the record that Tom's definition of "natural" is consistent with consumers' understanding of the term, the NAD added.
While the self-regulatory body was cognizant of the burden placed on the advertiser because the decision impacted the product name, it recommended that the claims "natural" and "Naturally Dry," appearing both in advertising and product packaging, be discontinued to avoid conveying "an express message that natural ingredients are responsible for the dryness provided by this antiperspirant, a message that is not supported."
Nothing in the decision precludes Tom's from "touting its use of natural ingredients in the product, including claims that the antiperspirant uses natural fragrances, does not contain preservatives, and that aluminum salt (that provides wetness protection) is derived from recycled aluminum," the NAD noted.
Why it matters: The NAD emphasized two points for advertisers in the decision: Ingredients that are derived from nature and undergo significant chemical alternations are often not "natural" in the way that consumers expect them to be. The self-regulatory body also explained that its procedures only preclude jurisdiction "when the challenged claims are subject to a court order," not where litigation has challenged certain claims and the case is then resolved through a settlement agreement. Tom's of Maine disagreed, and requested in the advertiser's statement that the dispute be referred to a panel of the NARB for review of the NAD's exercise of jurisdiction.
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Negative Options Trigger Deal With FTC
Nutritional supplement maker NutraClick will change its billing practices and refrain from using negative option features as part of a deal with the Federal Trade Commission.
The agency accused the Massachusetts-based company of using "free" samples of its beauty products and supplements to trick consumers into providing their personal information. To receive the samples of products such as Peak Life and ProBioSlim, consumers were required to provide their personal information—including credit card data—to pay for the cost of shipping and handling. But NutraClick also enrolled them in a membership program, the FTC said, billing consumers between $29.99 and $79.99 per month depending on the product.
Because consumers did not realize they were being enrolled in the program, they often missed the 18-day trial period deadline to cancel, the agency added. NutraClick made "tens of millions of dollars" from the unauthorized recurring charges, the FTC said, and upwards of 70,000 complaints were filed about the company.
To settle the charges of violating the Federal Trade Commission Act and the Restore Online Shoppers' Confidence Act, NutraClick agreed to change its billing practices. The stipulated order prohibits the company from obtaining consumers' billing information without first disclosing that there will be a charge or that the charge will increase after a trial period, and that the charges will be on a recurring basis unless the consumer cancels. The company must also set details about the range of costs and the deadline and method for cancelling.
Within 10 days, consumers must receive confirmation of a sales transaction that includes the clear disclosures required by the order. NutraClick is also barred from using consumers' billing information to obtain payment absent express written authorization, from misrepresenting the cost of a product or service, or from falsely implying that offers are free when consumers will be charged. It must also provide a "simple" way for consumers to cancel.
The company must also turn over $350,000 to the FTC and avoid any future violations of ROSCA.
To read the complaint and the stipulated order in FTC v. NutraClick, click here.
Why it matters: In a blog post about the case, the FTC said companies should take a lesson from NutraClick's mistakes and remember that both the FTC Act and ROSCA apply to negative option plans, whether they are continuity plans (such as those used by NutraClick), trial conversions, or automatic renewals. Advertisers should also ensure that they clearly and conspicuously disclose all material terms of the program and that they obtain consumers' express informed consent before charging their credit cards.
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