New York Advertising Lawyers Blog

The FTC has approved a new Business Opportunity Rule that will be effective March 1, 2012. The Rule is intended to replace the original 1978 Trade Regulation Rule. While there are a number of important components to the new Rule, a key component is to simplify and reduce the number of required disclosures from about 20 items to one single page specific form labeled "Disclosure of important Information about Business Opportunity" While this may at first glance appear to be beneficial to marketers, in fact the new Rule will likely destroy the ability of many marketers to close a sale, especially where telemarketing is involved.

The new Disclosure form must be provided to the prospective customer at least seven days in advance of requesting that the customer sign any contract or agree to pay any money. This seven day advance requirement may prove to be an insurmountable obstacle for telemarketers.

The Disclosure statement was cover five specific categories of information and must be on a specific form prepared by the FTC:

1. Seller's identity.

2. Is an earnings claim being made? The earnings claim can be express or implied. Thus you will earn $x for each widget that you sell is an express claim. Similarly, "I was able to buy a beautiful house, or a new car" would be an implied earnings claim triggering the disclosure. If yes, specific supporting information must be covered including specific level of sales, income and profit that can be reasonably expected. Moreover, if an earnings claim is made, there must be a separate document entitled "Earnings Claim Statement Required By Law" that must be presented. That statement must include the number and percentage of buyers who got the promised result.

3. Whether the seller or its affiliates or key personnel have been involved in certain legal actions within the past 10 years, and if so a separate list of such items.

4. Whether the seller has a cancellation or refund policy, and if yes, the material terms.

5. A list of, and contact information for, all other persons who have bought this opportunity within the past 3 years (up to maximum of 100,000) in order for the prospective buyer to be able to contact them, and discuss their experiences and what was told to them. This information should include the purchaser's name, state and telephone number, but not the address or city.

The Rule covers a wide variety of business opportunities and applies to commercial arrangements where a seller solicits a prospective buyer to enter into a new business, including a work at home opportunity, where the buyer is to make payment. There is no minimum payment threshold that triggers the rule. It does not apply to MLM programs. It is triggered by 3 elements:

1. Seller must solicit prospect to enter a business.

2. A payment must be made or promised. This does not include the purchase of a reasonable amount of inventory at bona fide wholesale prices.

3. Seller must offer to provide locations, outlets, customers or assistance, or offer to buy back any goods that the prospect makes.

Given the onerous nature of the disclosures, this Rule threatens to severely restrict the ability of marketers of business opportunities to stay in business.

     Facebook has agreed to settle FTC claims that it deceived consumers by telling them they could keep their information on Facebook private, and then repeatedly allowing the information to be shared and made public. The settlement shows the FTC's intentions to enforce its privacy mandate in the social media world.

     The FTC charges stem from changes Facebook made to its privacy settings in December 2009 to make aspects of users' profiles public by default, despite the fact that users had deliberately programmed their privacy settings to confine that information to a specific group of friends or family.

     The proposed FTC settlement bars Facebook from making any further deceptive privacy claims, requires that it get consumers' express consent before it changes the way it shares their data, requires that it prevent anyone from accessing a user's material more than 30 days after the user has deleted his or her account; requires that it establish and maintain a comprehensive privacy program; and requires that it undergo a third-party privacy audit every two years for the next 20 years.

     The FTC vote to accept the Facebook settlement agreement was 4-0. The FTC will publish a description of the agreement in the Federal Register and it will be subject to public comment through December 30, 2011, after which time the FTC will decide whether to make the proposed consent order final.

     Google Inc. agreed to a similar deal with outside audits every other year for the next 20 years after an investigation into Google's handing of personal information in its launch of its Buzz service. Twitter Inc. also agreed to outside audits every other year for 10 years after it was charged with "serious lapses" in its data-security practices after hackers broke into accounts, including one belonging to President Barack Obama.

     Take away: The government is pushing to hold companies more accountable for the personal data they collect, store and trade. Companies need to be vigilant about implementing comprehensive privacy programs that are tailored to their individual needs. In addition, once a company makes a material change in its policies, it needs to consider whether the consumer's affirmative consent will be required.

The Chief Justice of the United States Supreme Court, John Roberts remarked, "this is the strangest statute I have ever seen." He was talking about the Telephone Consumer Protection Act, or TCPA. The Supreme Court held oral arguments in the case of Mims v. Arrow Financial Services on November 28, 2011 in order to decide whether plaintiffs can choose between filing lawsuits in state or federal court, or will be limited to state courts when the amount in controversy is less than $75,000. (If the amount being sought is more than $75,000, and the defendant is from a different state then the plaintiff, the rules of diversity allow federal jurisdiction. Diversity jurisdiction is not at issue in the Mims case).

The reason the Chief Justice was confused is that when Congress passed the TCPA, it included enigmatic language governing a plaintiff's choice of court systems that was either never thought through, or was left intentionally vague for courts to decide later.

The default rule is that if a plaintiff is suing under a federal statute, he or she has the right to have his case heard in federal court. The wording of the TCPA allows cases to be brought in state court but is silent about federal court. It seems as though Congress intended for these cases to be brought only in state court, but it stopped short of saying so when it passed the legislation in 1991. So will the default rule apply, or will Congress' seemingly unexpressed intent rule the day?

Trying to guess which the way the Supreme Court will rule is often as unpredictable as telling fortunes by reading tea leaves, but every indication is that the decision will be a close one: in 1998, current Supreme Court Justice Samuel Alito, then sitting on the Third Circuit Court of Appeals in Philadelphia, voted to allow plaintiffs to file in federal court, but was outvoted 2-1 on the issue. On the other hand, the questions asked during oral arguments by Justices Andrew Kennedy and Stephen Breyer indicated they are troubled by the fact that defendants would be able to take small claims cases and remove them to federal courts, thus coercing the plaintiffs to hire lawyers. We will continue to monitor this case and will post an update when the Supreme Court issues its ruling.

In response to a challenge by 1-800 Contacts, Inc., the National Advertising Division ("NAD") has recommended that Coastal Contacts, Inc. discontinue an "up to 70 percent" savings claim and modify advertising that promoted "free" products so that the material terms are clearly and conspicuously disclosed at the outset of the offer. Perhaps more importantly, NAD ruled that marketers can legitimately entice consumers into "liking" pages on Facebook by offering discounts, promotions or free merchandise without triggering social media endorsement requirements.

NAD also determined that since actual consumers "liked" the Coastal Facebook page, and those consumers who participated in the like-gated promotion received the benefit of the promotion, Coastal does have the general social endorsement that the "likes" convey; however, recommended that Coastal clarify that the number of Facebook "fans" or "likes" noted in their press releases is based on the total number of "fans" or "likes" Coastal has received from all of its Facebook pages globally.

Moreover, because the information regarding additional terms and conditions that applied to the offer of "free" merchandise did not appear until after consumers entered the promotion by "liking" Coastal's Facebook page, NAD recommended that Coastal provide a clear and conspicuous explanation of the additional terms and conditions that apply to any promotional offer of "free" merchandise at the outset in the future.

Take away: While the ruling is a positive one for marketers relying on social media promotions to develop brand awareness and consumer interaction, marketers still need to be sure that they also consider the standard rules of disclosure. In addition, marketers need to be careful that consumer interaction is not still overstated as an endorsement.

Complimentary Webinar

Olshan Grundman Frome Rosenzweig & Wolosky will present a webinar focusing on "Legal Issues Involving Social Media," December 7, 2011, 12:30 - 1:30 p.m., EST.

This program should be of interest to Corporate Counsel as well as those involved in matters concerning Advertising and Marketing, Intellectual Property, Employment Practices, and social media in general. CLE credit will be available. This timely program will feature a discussion of the following issues:

Rules of the road related to conducting Facebook and Twitter Promotion

Use of Facebook and other social media as part of a marketing campaign

Intellectual Property issues arising from use of social media -- who owns what and how to avoid the most common mistakes

Acceptable employment policies and potential legal ramification of social media use.

Olshan speakers will be Andrew B. Lustigman, leader of Olshan's Advertising, Promotions and Marketing Practice and a noted speaker and writer on topics related to social media; Adam Z. Solomon of the Advertising, Promotions and Marketing Practice who deals primarily with matters involving advertising and promotion; Mary L. Grieco, who has extensive experience in domestic and international trademark issues and intellectual property matters; and Aliza F. Herzberg, whose practice focuses on helping employers manage all aspects of their relationships with their employees.

REGISTRATION

Please follow these steps to register for the webinar:

Go to: https://university.learnlive.com/NewUser.aspx?brandingid=2088

Complete the New User Registration fields which require only your name, title, email address and organization.

Click the "Submit" button, which brings you to the Catalog page.

Click the "Enroll" button for the session titled Legal Issues Involving Social Media Marketing

CLE

  In order to receive CLE credit for the webinar you are required to click all of the participation pop-ups that will appear throughout the program. You must also be registered and view the webinar from your own computer. This seminar has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1 credit hour in the area of Professional Practice/Practice Management and is appropriate for experienced attorneys only

The Federal Trade Commission is seeking public comment on its Textile Fiber Products Identification Act. These rules require, among other things, that textiles sold in the United States carry labels disclosing the generic names and percentages by weight of the fibers in the product, the manufacturer or marketer name, and the country where the product was processed or manufactured.

The Textile Fiber Products Identification Act requires marketers to attach a label to each covered textile product disclosing: (1) the generic names and percentages by weight of the fibers in the product; (2) the name under which the manufacturer or other responsible company does business or, in lieu thereof, the registered identification number ("RN number") of such company; and (3) the name of the country where the product was processed and (4) the name of the company where the product was processed and manufactured.

The FTC is seeking comments on the benefits and cost of the Textile Labeling Rules, as well as whether it should:

• Modify the provision addressing generic fiber names so that the reference to the international standard for manufactured fibers reflects the updated standard;

• Clarify the provisions addressing textile products containing elastic material and "trimmings";

• Address the use of multiple languages in making required disclosures;

• Clarify disclosure requirements applicable to written advertising, including Internet advertising;

• Clarify or revise the list of exclusions from the Textile Fiber Products Identification Act;

• Add or clarify definitions of terms set forth in the Rules; and

• Modify consumer and business education materials and continue printing paper copies in these materials,

The FTC is also seeking comment on:

• The benefits and cost of the requirement of the Textile Fiber Products Identification Act that, under certain circumstances, businesses use identification issued by the FTC;

• The extent to which retailers obtain guarantees and continuing guarantees for textile products; and

• Whether the extent or manner of importation indicates that the guarantee provisions of the Act and Rules should be modified.

The FTC's regulatory review program has systematically reviewed its regulations to ensure that they continue to achieve their intended goals without unduly burdening commerce. All rules and guides are scheduled to be reviewed ten years after implementation and ten years after the completion of each review. The last review of the Textile Rules was completed in 1998.

The text of the Federal Register notice can be found here.  Comments must be received by January 3, 2012.

By now, any company that provides consumers with terms and conditions covering the terms of sale should be aware of the Supreme Court's recent decision in AT&T Mobility LLC v. Concepcion. That decision, issued earlier this year, enforced an arbitration clause and a class action waiver provisions to prevent dissatisfied consumers from filing class actions or even suing at all. Previously, it was unclear whether a consumer could be required to arbitrate instead of going to court, but the Concepcion ruling gave these clauses a general stamp of approval. Now, a California federal court has gone a little farther: if a lawsuit was started before the Concepcion decision was issued, a company can ask a court to retroactively apply the arbitration clause by dismissing the lawsuit and belatedly applying the arbitration clause. This is exactly what happened in a Southern District of California decision, Bailey v. Household Finance Corp., issued on October 28th. Debra Ann Bailey filed a lawsuit, saying Household Finance was harassing her with illegal telephone calls to collect a loan she hadn't paid back. The terms of her loan included an arbitration clause and class action waiver, but when the lawsuit was filed in 2010, Household Finance did not invoke those provisions because it didn't think the court would enforce them. When Household Finance learned of the Concepcion ruling in 2011, it filed a motion to dismiss the lawsuit and compel arbitration. Ms. Bailey argued it was too late, that Household Finance had waived its right to seek arbitration because it had been participating in the lawsuit for ten months. Judge William Q. Hayes sided with Household Finance, and required the plaintiff to go to arbitration, where she could not proceed with the class action. Judge Hayes wrote that Household Finance "could have reasonably believed that, prior to [Concepcion], California courts would have found the arbitration agreement to be unenforceable. A few months after [Concepcion] was decided, Defendants filed the Motion to Compel Arbitration. Accordingly, Plaintiff has failed to show that Defendants acted inconsistently with a known right to arbitrate." The case was dismissed and the parties ordered to proceed to arbitration, a huge victory for Household Finance.

The lesson to be learned here is that any company facing a class action lawsuit despite having an arbitration clause in their terms and conditions, should carefully examine their options in light of this week's decision. Moreover, companies who wish to attempt to secure such protections should consider obtaining customer consent to an alternative dispute resolution provision containing a class action waiver.

As part of its ongoing review of FTC rules and guides, the FTC is seeking public comment on proposed amendments to its Mail or Telephone Order Merchandise Rule.

The Rule was initially issued in 1975 and commonly known as the 30-day rule. The Rule governs, among other things, a direct marketing merchant's obligations under federal law with respect to the shipment of merchandise. In short, under the Rule, a merchant must have a good faith belief that it will meet a stated shipping time and if no shipment time is stated, then fulfillment must be made within 30 days. The Rule also requires merchants to send notices if a represented shipment date will not be made and, depending on the circumstances, either offer or make refunds. There are other restrictions with respect to unordered merchandise and refunds. An FTC publication, A Business Guide to the FTC's Mail or Telephone Order Merchandise Rule, offers information about the Rule and how to comply.

Four years ago, the FTC sought public comment on how the rule could be updated to address changes in technology. Now the FTC has sought to amend the Rule. According to the Federal Register notice, the amendments seek to:

• Clarify that the Rule covers all orders placed over the Internet (which was essentially done in 1993);
• Revise the Rule to permit new refund delivery options to allow sellers to provide refunds and refund notices to buyers by any means at least as fast and reliable as first-class mail;
• Clarify sellers' obligations when buyers use payment methods not spelled out in the Rule, such as debit cards or prepaid gift cards;
• Require that refunds be made within seven working days for purchases that were made using third-party credit, such as Visa or MasterCard cards. For credit sales where the seller is the creditor (such as merchants using their own store charge cards) the refund deadline would remain one billing cycle.

Marketers who seek to have input on the rule should provide comments on the proposed amendments. Comments must be received by the FTC by December 14, 2011.