FTC Warns Companies It Will Impose Civil Penalties for Misleading Online Reviews

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By: Jacob D. Alderdice

Shoppers in online marketplaces, or customers checking reviews before dining or retaining a service, have become increasingly reliant on internet testimonials. Mark P. of Hoboken, NJ rates Hank’s Burger Depot 5 out of 5 stars, and he tells you it’s the best burger and shake he’s ever had. But did Hank promise Mark P. a free meal in exchange for leaving that review? Does Mark P. work at the Burger Depot? Does Mark P. even exist? As e-commerce, social media, and influencer marketing have all grown and become intertwined, it has become increasingly difficult to discern what constitutes an authentic positive review or endorsement for a product or service online.

Recently, the Federal Trade Commission issued a Laptop_iStock_000004929105Medium
formal warning to hundreds of companies across a wide span of US industries, indicating that it will penalize deceptive practices related to fake or misleading reviews and endorsements. This warning follows increased litigation in recent years over these practices, which remains ongoing.

On October 13, 2021, the FTC formally issued a Notice of Penalty Offenses, stating it was “blanketing industry” with the warning that the FTC will use its penalty powers under Section 5(m)(1)(B) of the FTC Act if those companies engage in deceptive conduct regarding online endorsements and reviews. The list of more than 700 companies includes many of the biggest companies in the United States, including Amazon, Google, and Walmart, in a variety of sectors, and also includes advertisers and advertising agencies. The inclusion of the companies does not mean they have engaged in these practices previously, but it does mean that the FTC will find that they are on notice of the prohibition if they are found to have engaged in such deceptive practices in the future. The penalties for future violations are significant—up to $43,792 for each violation.

The Notice defines the deceptive conduct as including—but not limited to—falsely claiming an endorsement by a third party; misrepresenting whether an endorser is an actual, current, or recent user; using an endorsement to make deceptive performance claims; failing to disclose an unexpected material connection with an endorser; and misrepresenting that the experience of endorsers represents consumers’ typical experience. The FTC issued FAQs elaborating on the proscribed conduct. For example, the proscribed “unexpected material connection” could include the endorser being a relative or employee of the marketer, or if the endorser has been paid or given something of value to tout the product.

The FTC’s announcement that it will rely on its Section 5 civil penalty powers pursuant follows a recent Supreme Court ruling that stripped the FTC of other enforcement powers. In late April 2021, the Court unanimously ruled in AMG Capital Management, LLC v. FTC that Section 13(b) of the FTC Act does not allow the FTC to seek monetary remedies in federal court. Immediately following the ruling, then-FTC Commissioner (and recently confirmed CFPB Director) Rohit Chopra urged the FTC to “deploy the FTC’s dormant Penalty Offense Authority” under Section 5 to make up for the loss of the Section 13(b) powers. In October 2020—in anticipation of the Court’s ruling in AMG Capital Management—Chopra co-authored an article in the University of Pennsylvania Law Review with Samuel A.A. Levine, titled “The Case for Resurrecting the FTC Act’s Penalty Offense Authority,” which maps out the FTC’s penalty offense authority under Section 5(m)(1)(B) of the FTC Act and promotes the use of that authority particularly for “online disinformation.”

Aside from the FTC, consumers and competitors have increasingly litigated these questions in the past few years, seeking ways of holding companies accountable for faking reviews in order to gain a leg up on competitors or mislead consumers. Litigants have relied on the Lanham Act’s prohibition against false advertising, state consumer protection statutes, and other state law claims. Outcomes have been mixed, depending on the legal theory and the parties’ ability to prove or sufficiently allege that a company has falsified reviews. A sample of recent cases related to fake online reviews or endorsements across jurisdictions appears below:

  • In a dispute between two cloud-based communications services, RingCentral asserted defamation claims against Nextiva both for Nextiva’s alleged fake negative reviews of RingCentral, and Nextiva’s fake positive reviews of itself—which RingCentral alleged cast it in a bad light by comparison. At the summary judgment stage, a judge in the District Court for the Northern District of California dismissed RingCentral’s defamation claims as to the fake positive reviews, holding that those reviews—which were only about Nextiva—were not “of or concerning” the plaintiff RingCentral, a required element for a defamation claim. See Ringcentral, Inc. v. Nextiva, Inc., No. 19-CV-02626-NC, 2021 WL 2476879, at *2 (N.D. Cal. June 17, 2021).

  • In a dispute between two companies selling dietary supplements, Vitamins Online alleged that the defendant NatureWise manipulated the Amazon.com customer review system by, among other things, directing its employees to “up vote” its products’ good reviews, and offering free products to customers in exchange for good reviews. Following a bench trial, a judge in the District Court for the District of Utah held that this conduct violated the Lanham Act’s prohibition of false advertising and Utah’s common law unfair competition laws. See Vitamins Online, Inc. v. HeartWise, Inc, No. 2:13-CV-00982-DAK, 2020 WL 6581050, at *21 (D. Utah Nov. 10, 2020). The court held that Vitamins Online was entitled to the disgorgement of NatureWise’s ill-gotten profits of nearly $10 million.

  • In the District of New Jersey, courts have held that the allegations that companies manipulated Amazon reviews of their products, such as by faking customer reviews or flooding the site with “professional reviews” (those elicited by the company’s offering of a free product), are sufficient to state claims under federal and state false advertising laws, as well as claims for tortious interference with prospective business advantage. See AlphaCard Sys. LLC v. Fery LLC, No. CV1920110MASTJB, 2020 WL 4736072, at *3 (D.N.J. Aug. 14, 2020); Interlink Products International, Inc. v. F & W Trading LLC, No. 15-1340, 2016 WL 1260713, at *9 (D.N.J. Mar. 31, 2016).

  • Casper Sleep, Inc., the online company selling Casper mattresses, has been a fairly active litigant regarding allegedly fake or manipulated online reviews—both as a plaintiff and defendant. Recently, in the Southern District of New York, a mattress competitor asserted counterclaims under the Lanham Act, alleging that Casper faked its positive Amazon reviews. The competitor relied upon an “independent website” that assesses Amazon reviews, which gave Casper a “fail” grade due to purported indicators of “unnatural reviews,” such as many positive reviews with no corresponding comments and the wholesale deletion of large portions of Casper’s positive reviews. The court granted Casper’s motion to dismiss these claims, holding that the allegations were too speculative to show that Casper actually faked the positive Amazon reviews. See Casper Sleep, Inc. v. Nectar Brand LLC, No. 18 CIV. 4459 (PGG), 2020 WL 5659581, at *11 (S.D.N.Y. Sept. 23, 2020); see also GhostBed, Inc. v. Casper Sleep, Inc., No. 0:15-CV-62571-WPD, 2018 WL 2213002, at *7 (S.D. Fla. May 3, 2018) (dismissing Lanham Act claims against Casper at the summary judgment stage, because the plaintiff did not establish that Casper made any false or misleading statements in its use of “affiliate relationships with online reviewers”).

Factors to Consider in Disclosing a Cybersecurity Breach to the SEC

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In this article published by Westlaw Today, Partners Brian R. Boch and Charles D. Riely and Associate William R. Erlain explain that the US Securities and Exchange Commission has ramped up its enforcement against misleading cybersecurity disclosures and announced plans to consider adopting new disclosure obligations. The authors highlight key factors to consider in determining whether and how a public company should disclose a cybersecurity breach in light of recent SEC guidance, enforcement actions and investigations, and private securities actions.

Click here to read the full article.


California Law Adds New Restrictions on Recyclability Claims

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By: Allison A. Torrence

RecyclingOn October 5, 2021, California Governor Newsom signed SB 343, addressing recyclability claims on products and in advertising. The Act amends existing sections of California’s Business and Professions Code as well as the Public Resource Code relating to environmental advertising. These laws collectively provide California’s version of recyclability consumer protection laws, similar to but going beyond the Federal Trade Commission Guides for the Use of Environmental Marketing Claims (Green Guides).

Prior to SB 343, existing California law made it unlawful for any person to make any untruthful, deceptive, or misleading environmental marketing claim, and required that environmental marketing claims be substantiated by competent and reliable evidence. Additionally, a person making any recyclability claims was required to maintain written records supporting the validity of those representations, including whether, the claims conform with the Green Guides.

Those requirements are generally left intact, with additional obligations added by SB 343. The first big change made by SB 343 is to specifically add the use of the chasing arrow symbol as a way that a person might make a misleading environmental marketing claim in marketing or on a product label. (Business and Professions Code § 17580(a).) Next, SB 343 requires the Department of Resources Recycling and Recovery, by January 1, 2024, to update regulations requiring disposal facilities to provide information on recycling data. Based on the information published by the department, a product or packaging is considered recyclable only if the product or packaging is collected for recycling by recycling programs for jurisdictions that collectively encompass at least 60% of the population of the state. (Public Resources Code § 42355.51(d)(2).) The new law also provides additional criteria related to curb-side recycling, that grow more stringent over time, and PFAS content of plastic material, among other provisions. (Public Resources Code § 42355.51(d)(3).) A person making recyclability claims must keep written records of whether the consumer good meets all of the criteria for statewide recyclability pursuant to these new provisions. (Business and Professions Code § 17580(a)(6).)

Finally, while existing California law governed what resin identification code could be placed on plastic containers (i.e., #1 PETE, #2 HDPE), SB 343 states that resin identification code numbers cannot be placed inside a chasing arrows symbol unless the rigid plastic bottle or rigid plastic container meets the new statewide recyclability criteria discussed above. (Public Resources Code § 18015(d).)

This new law is another hurdle facing companies making environmental marketing claims. For companies selling products in California, it is not sufficient to simply follow the FTC Green Guides. Instead, companies must be aware of the specific nuances and requirements in California and developments in other states.


Ninth Circuit Puts a Cap on Coca-Cola Class Certification Order

 

By: Alexander M. Smith

SodaA new decision in the Ninth Circuit significantly limits which consumers may have standing to seek an injunction against false advertising or labeling. For the past several years, the law in the Ninth Circuit was that a “previously deceived consumer may have standing to seek an injunction against false advertising or labeling, even though the consumer now knows or suspects that the advertising was false at the time of the original purchase,” because a consumer’s “[k]nowledge that the advertisement or label was false in the past does not equate to knowledge that it will remain false in the future.” Davidson v. Kimberly-Clark Co., 889 F.3d 956, 969 (9th Cir. 2018). But in August 2021, the Ninth Circuit significantly limited this holding by clarifying that a consumer’s “abstract interest in compliance with labeling requirements” or desire for a manufacturer to “truthfully label its products” does not suffice to establish Article III standing under Davidson. Engurasoff v. Coca-Cola Refreshments USA, Inc., No. 25-15742, 2021 WL 3878654, at *2 (9th Cir. Aug. 31, 2021).

Engurasoff arises out of a long-running multidistrict litigation in which the plaintiffs alleged that Coke, Coca-Cola’s signature cola, is mislabeled as having “no preservatives” and “no artificial flavors” because it contains phosphoric acid, which allegedly functions as both an “artificial flavor” and a “chemical preservative.” In February 2020, the district court granted the plaintiffs’ motion to certify an injunctive relief class under Rule 23(b)(2) and held that they had established standing to seek injunctive relief under Davidson. In reaching this conclusion, the district court reasoned that consumers could satisfy Davidson by alleging either (1) that “their inability to rely on the labels would cause them to refrain from purchasing a product that they otherwise would want” or (2) that they would “purchase the product in the future, despite the fact that it was once marred by false advertising or labeling, because they may reasonably, but incorrectly assume the product was improved.” In re Coca-Cola Mktg. & Sales Practices Litig., No, 14-2555, 2020 WL 759388, at *5 (N.D. Cal. Feb. 14, 2020) (citation and internal quotation marks omitted). The district court agreed with Coca-Cola that the plaintiffs did not satisfy the second test because there was no reasonable possibility that Coca-Cola would stop using phosphoric acid as an ingredient in Coke, whose formula—leaving aside the ill-fated rollout of New Coke—has remained largely unchanged for over a century. But the district court nonetheless found that the plaintiffs had satisfied the first test by alleging that they would purchase Coke in the future, even if it continued to contain phosphoric acid, so long as the labeling either disclosed the presence of phosphoric acid or refrained from representing that Coke was free of preservatives and artificial flavors. See id. at *7-9.

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Customers Cannot Assert a Claim Based on Starbucks’s Alleged Failure to Provide the “Perfect” Coffee Experience

   

By: Kate T. Spelman

CoffeeOn August 27, 2021, the Second Circuit upheld dismissal of a putative class action brought by Starbucks customers under New York consumer protection statutes. The plaintiffs alleged that Starbucks’s marketing materials promoting the quality of its coffee – including claims such as “the finest whole bean coffees,” “Best Coffee for the Best You,” and a “PERFECT” coffee experience – were misleading due to the chain’s alleged use of pest-control pesticides in some of its Manhattan stores. The district court disagreed, dismissing the complaint on the basis that the plaintiffs did not allege “any statements likely to mislead reasonable consumers.” George v. Starbucks Corp., No. 19-6185, 2020 WL 6802955, at *2 (S.D.N.Y. Nov. 19, 2020). The court found that the vast majority of the challenged statements were patently puffery, while the only statement that could conceivably support a claim for deceptive business practices – that Starbucks baked goods contain “no artificial dyes or flavors” – was not rendered false or misleading by the alleged use of pesticides in Starbucks’s stores. Id.

Undeterred, the plaintiffs appealed to the Second Circuit, arguing that Starbucks’s advertising implied quality and purity inconsistent with the use of pesticides. Again, the plaintiffs were rebuffed by the court. In a short summary order, the Second Circuit agreed with the district court’s reasoning and held that “almost all of Starbucks’s statements referenced in the amended complaint constitute puffery.” George v. Starbucks Corp., No. 20-4050-CV, 2021 WL 3825208, at *1 (2d Cir. Aug. 27, 2021). Those that were “specific enough to be more than puffery” referred only to “how Starbucks sources its products and crafts its coffee and the ingredients it uses in its baked goods” such that “[n]o reasonable consumer would believe that these statements communicate anything about the use of pesticide[s] in Starbucks’s stores.” Id. at *2.

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The Ninth and Seventh Circuits Revive Robocall Suits Under the TCPA

 

By: Lina R. Powell

Smartphone computerCourts have seen a flurry of activity in the Telephone Consumer Protection Act (TCPA) realm this year—and August was no exception. In April 2021, the Supreme Court’s Facebook v. Duguid, 141 S. Ct. 1163 (2021), settled the long-debated question of what constitutes an automatic telephone dialing system under the TCPA, 47 U.S.C. § 227. Many anticipated the Court’s willingness to narrow the scope of claims brought under the statute would narrow the number of lawsuits brought under the TCPA. But TCPA cases continue to proliferate, and two appellate courts recently revived claims based on the TCPA.

On August 10, 2021, the Ninth Circuit revived a lawsuit against Fraser Financial and Insurance Services, holding that job recruitment robocalls received by cell phones fall within the TCPA’s scope if the call “did not involve an emergency and was not made with [the consumer’s] prior express consent.” Loyhayem v. Fraser Fin. & Ins. Servs., Inc., ---F. 4th---, 2021 WL 3504057, *2 (9th Cir. Aug. 10, 2021). The TCPA generally makes it illegal to place robocalls to someone’s home phone or cell phone. The Ninth Circuit held that the district court misread the governing robocall consent standards in dismissing the action. While the plaintiff admitted that the robocalls did not involve “advertising or telemarketing”—which are prohibited under the TCPA—the Ninth Circuit rejected the argument that only robocalls involving “advertising or telemarketing” are subject to the TCPA. Id. Rather, the Ninth Circuit noted that the TCPA applies to “any call” that is “made to a cell phone using an automatic telephone dialing system or an artificial or pre-recorded voice, unless the call is made either for emergency purposes or with the prior express consent of the person being called,” and that such consent be given either orally or in writing. Id. The Ninth Circuit found that the plaintiff’s allegations that he had not consented orally or in writing to receiving Fraser Financial’s call were sufficient to survive a motion to dismiss. Id. at *3.

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A Benefytt or a Curse: Ninth Circuit Holds That Bristol-Myers Does Not Apply Before Class Certification

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By: Alexander M. Smith

In 2017, the Supreme Court held in Bristol-Myers Squibb Co. v. Superior Court, 137 S. Ct. 1773 (2017), that a defendant in a mass tort action is not subject to specific personal jurisdiction as to the claims of non-resident plaintiffs whose injuries lack a sufficient connection to the forum state. The Court did not decide, however, whether its holding applied to nationwide class actions. And in the four years following Bristol-Myers, district courts in the Ninth Circuit have reached highly divergent results:

  • Some district courts have “agree[d] . . . that Bristol-Myers Squibb applies in the nationwide class action context” and have dismissed claims brought on behalf of putative nationwide classes, reasoning that “a state cannot assert specific personal jurisdiction for the claims of unnamed class members that would not be subject to specific personal jurisdiction if asserted as individual claims.” Carpenter v. PetSmart, Inc., 441 F. Supp. 3d 1028, 1035 (S.D. Cal. 2020); see also, e.g., Wenokur v. AXA Equitable Life Ins. Co., No. 17-165, 2017 WL 4357916, at *4 (D. Ariz. Oct. 2, 2017) (“The Court notes that it lacks personal jurisdiction over the claims of putative class members with no connection to Arizona and therefore would not be able to certify a nationwide class.”).

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CFPB Continues to Focus on Debt-Relief and Credit-Repair Services

By: Amina Stone-Taylor

Credit-reportIn recent years, the Consumer Financial Protection Bureau (CFPB) has focused its Bureau resources on companies offering credit repair and debt relief services.[1] In a 2019 consumer advisory, the CFPB reported that more than half the individuals who submitted a complaint to the Bureau about credit repair categorized it as “fraud/scam.”[2] The CFPB has also undertaken a number of enforcement actions focused on the credit repair industry.[3]

On June 28, 2021, the CFPB announced the proposed resolution of another enforcement matter arising from credit repair services—this time against Burlington Financial Group, LLC.  The CFPB and the Attorney General of the State of Georgia filed a joint complaint against Burlington Financial and its owners/executives, along with a proposed joint stipulation of final judgment and order. The complaint alleges that Burlington Financial misled consumers into believing the company could lower or eliminate credit-card debts and improve their credit score, and violated the Telemarketing Sale Rule (TSR) and the Consumer Financial Protection Act (CFPA) through their deceptive marketing tactics.[4] The CFPB stated, “Burlington Financial used telemarketing to solicit people with false promises that the company’s services would eliminate credit-card debts.”[5] The stipulated proposed order permanently bans Burlington Financial and its owners from providing any financial-advisory, debt relief, or credit repair services.[6] The company also will be responsible for paying a civil money penalty of $151,001.[7]

If you would like to read more about the CFPB’s claims against and resolution with Burlington Financial, please click here for access to the CFPB’s press release and filings.

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Consumer Financial Protection Bureau Releases Its 2020 Supervisory Highlights Report

By: Felicitas L. Reyes

New-Development-IconThe Consumer Financial Protection Bureau (CFPB) recently released the latest version of its Supervisory Highlights report, which summarizes the findings of the Bureau’s supervisory examinations in 2020. The CFPB identified four findings from the report as “particularly concerning”:

  1. Consumer Reporting Companies’ Use of Data From “Unreliable” Furnishers: The CFPB reported that its examiners found that consumer reporting companies have accepted and reported consumer data received from third-party furnishers, while ignoring signs that the data furnishers were unreliable. The CFPB warned that it “will remain diligent and consumer reporting companies are on notice with respect to risks posed by accepting data from furnishers where there are indications of unreliability.”

  2. Redlining: The report states that CFPB examiners found evidence of redlining, including direct mail marketing materials showcasing pictures of only white people and locating credit loan offices “almost exclusively” in majority-white neighborhoods. CFPB examiners found that these actions “lowered the number of applications from minority neighborhoods relative to other comparable lenders.”

  3. Regulation X Foreclosure Issues: The report states CFPB examinations identified “several violations” by mortgage servicers of the servicing rules in Regulation X, including filing for a foreclosure before evaluating borrower’s appeals or initiating a foreclosure prior to the date that they told consumers they would.  On June 28, 2021, the CFPB issued a final rule that it contends will help consumers avoid foreclosures as the emergency federal foreclosure protections expire.

  4. Student Loan Servicing for the PSLF Program: CFPB examiners found violations in the type of information that student loan servicers gave consumers about the Public Service Loan Forgiveness (PSLF) program. Examiners found that student loan servicers were giving consumers incorrect information that could potentially bar access to the program and could result in thousands of dollars lost for these consumers.

If you would like to read more about the areas mentioned above and other consumer law violations that the CFPB report discusses, please click here for access to the full supervisory highlights report and press release. 


EU Guidance on Forced Labour in Supply Chains

   

By: Paul FeldbergLucy Blake, and Karam Jardaneh

New-Update-IconIntroduction

Earlier this week, the European Commission published its Guidance “On Due Diligence For EU Businesses To Address The Risk Of Forced Labour In Their Operations And Supply Chains”. 

The document, which is not legally binding, provides practical guidance on how to use existing international, voluntary, due diligence guidelines and principles when dealing with the risk of forced labour in supply chains.

The European Commission made clear in its press release, that the Guidance forms part of the EU’s wider strategy to defend human rights and strengthen the resilience and sustainability of the EU supply chain. The European Commission sees the Guidance as encouragement for EU businesses to take appropriate measures regarding their supply chains ahead of the EU’s introduction of a mandatory due diligence duty for businesses operating in the EU. As set out in our previous Client Alert, the due diligence duty will require certain businesses operating in the EU to identify, prevent, mitigate and account for adverse human rights and environmental impacts in their operations and supply chains. We will also cover this in more detail as well as other developments in Europe in a separate Client Alert. 

Who should consider the Guidance? 

Although the Guidance is directed at EU companies, it is based on international instruments aimed at companies globally. This includes the OECD Due Diligence Guidance For Responsible Business Conduct (the OECD Guidelines) and the UN Guiding Principles on Business and Human Rights (UNGPs). While the UNGPs are not “legally binding” and are often referred to as “soft-law”, there are growing expectations for companies worldwide to adhere to them. This “soft law” has been evolving into “hard law” in multiple jurisdictions (the anticipated EU mandatory due diligence laws being a prime example). Therefore, we believe that this Guidance will be a helpful resource for companies globally.

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