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									        August 2006
Update on Consumer Protection


         Michael D. Hauser
       Andria Beeler-Norrholm
        Katherine M. Wallace

         Alston & Bird LLP
         September 11, 2006
                  Discussion Topics

 News and Developments of Interest
 Federal Trade Commission Update
 National Advertising Division Update
 Lanham Act Litigation and Case Update
 Consumer Protection Litigation Update
 Miscellaneous
              News and Developments of Interest

 FCC announced on July 27 th that rules governing unsolicited commercial
  faxes will go into effect August 1, 2006 despite business interests seeking
  clarification of rules. FCC rules codify Junk Fax Prevention Act of 2005.


 Consumer Protection Deputy Director, C. Lee Peeler, to leave FTC to
  become President of the NARC and Executive VP for National Advertising
  and Self-Regulation of the Council of Better Business Bureaus.


 FTC Chairman has formed Internet Access Task Force to examine issues
  raised by converging technologies and regulatory developments, including
  “network neutrality” laws and issues related to regulation of the Internet.
        Federal Trade Commission Update
 DIRECTV telemarketers to pay $75,000 for DNC violations
 FTC settles charges against spyware operation for $2 million
 FTC and Washington AG file claims against Digital Enterprises,
  Inc. for pop-up advertising operation
 Manufacturer of FuelMAX and Super FuelMax “fuel saving”
  devices ordered to pay $4.2 million
 4th Cir. upholds FTC’s “fencing-in” provision ordered against
  Telebrands Corp.
 Marketers of Chinese herbal supplements settle FTC challenges
  to product efficacy claims
             Federal Trade Commission Update
 DIRECTV Telemarketers to pay $75,000 penalty for DNC violations.
    Settlement agreement with Nomrah Records, Inc. and its president, Mark
     Harmon, in which Mr. Harmon to pay $75,000 civil penalty. Settlement
     terms also included strong injunctive relief. In settling charges filed in
     December 2005, DIRECTV paid $5.3 million.

 FTC settles charges against spyware operation for $2 million.
    According to the complaint, the defendants’ websites causes “installation
     boxes” to pop up on consumers’ screen offering a variety of freeware or
     warning consumers that Internet browsers were defective and offering
     security patches. Upon downloading supposed freeware or upgrades,
     consumers’ computers were infected with spyware that was difficult to
     remove and included software that tracked consumers’ Internet activity,
     caused pop-ads to appear, and related changes.
                Federal Trade Commission
 FTC v. Digital Enterprises, Inc., No. 2:06-cv-04923-CAS-AJW (C.D. Cal.
  August 8, 2006). FTC files suit against Digital Enterprises, Inc. (d/b/a
  Movieland.com) claiming that defendant downloaded software to consumers
  that repeatedly battered consumers’ computers with pop-up ads and music that
  could not be closed or minimized. The pop-ups demanded that consumers pay
  defendants a certain sum to end the pop-up cycle. According to the FTC
  claims, the defendants made the software difficult or impossible to uninstall.
  FTC charges that the scheme is unfair and deceptive and defendants made false
  statements in requesting payments to remove pop-up cycle. FTC is requesting
  court to order TRO and for defendants to give-up gains for consumer redress.


 State claims for violation of Washington’s consumer protection laws also filed
  against defendants by Washington State Attorney General.
                Federal Trade Commission
 FTC v. International Research and Development Corp. of Nevada, No.
  1:04-cv-06901 (N.D. Ill., August 22, 2006). Manufacturer of FuelMAX and
  Super FuelMax “fuel saving” devices that claimed to increase gas mileage,
  reduce fuel consumption and reduce emissions ordered to pay $4.2 million in
  consumer redress. Manufacturer also subject to lifetime ban on the
  manufacture, advertising, or sale of any similar fuel saving or emissions
  decreasing product. FTC claimed that product claims made by manufacturer
  were false.

 In October 2004, FTC filed complaint alleging that the marketers and resellers
  of FuelMAX and Super FuelMax violated FTC Act §5 and CAN SPAM Act.
  In May 2005, web site marketers and spammers promoting product settled with
  FTC.
                    Federal Trade Commission
 Telebrands Corp. v. FTC (4th Cir. August, 7 2006): The court denied
  Telebrands’ petition to modify the extent of the fencing-in provision ordered
  by the FTC because there was a “reasonable relationship” between the order
  and Telebrands’ violation.
       The FTC had alleged that ads for Telebrands’ “Ab Force” (an electric muscle stimulation
        abdominal belt) were false and misleading in violation of Sections 5 and 12 of the FTC Act.
       The ALJ concluded that Telebrands had made false and misleading claims in violation of the
        FTC Act even though Telebrands did not make such claims expressly. The ALJ concluded
        that Telebrands impliedly made false and misleading claims because it encouraged
        comparison to products that expressly made such claims.
       The FTC affirmed the ALJ’s conclusion that Telebrands violated the FTC Act, but entered a
        Final Order with a fencing-in provision that was larger than that imposed by the ALJ.
       Telebrands appealed the scope of the fencing-in provision ordered by the FTC. Telebrands
        did not appeal the decision that Telebrands had violated sections 5 and 12 of the FTC Act.
       After weighing the three factors considered by the FTC to determine if the “order coverage
        bears a reasonable relationship to the violation it is intended to remedy,” the Court denied
        Telebrands’ petition to modify the Final Order.
                Federal Trade Commission
 Marketers of Chinese herbal supplement settle FTC challenges to product
  efficacy claims.
     FTC v. Sagee U.S.A Group, Inc., No.: 2:04-cv-10560-GPS-CW (C.D.
      Cal., August 9, 2006). FTC alleged defendants made false and
      unsubstantiated efficacy claims regarding the health benefits of the herbal
      supplements. Defendants claimed that Sagee could improve memory,
      concentration, repair damaged brain cells, slow aging of brain, increase
      learning ability of people with mental handicaps, and treat various
      diseases. A January 2005 order prohibited defendants from making such
      unsubstantiated health claims, and FTC found defendants violated previous
      order.
     Settlement prohibits defendants from making such claims regarding the
      health benefits of any foods, drugs, devices, services and supplements and
      orders payment of $10,396 – all assets derived from sale of Dia-Cope
      supplement.
           National Advertising Division Update

 NAD
     Product Performance Claims
     Lowest Price Guarantees
     Claim Substantiation
     Compliance with Prior NAD Decision
     Format for Presentation of Advertising

 CARU
     Disclosures must be clearly understandable to a child
     Timing for airing of commercial directed at children

 ESRP
                               NAD Update
 Product Performance Claims
      NAD recommended that ACH Food Companies, maker of Mazola® cooking spray
       modify or discontinue advertising suggesting that competing cooking sprays
       contain ingredients that are not wholesome. Express claims included “Finally! A
       cooking spray with NO ALCOHOL, NO SILICONE.” “Pure Aroma. Pure Taste.”
       NAD determine use of term “pure” was supported and “Pure Aroma. Pure Taste”
       was non-actionable puffery. However, commercial reasonably conveyed a falsely
       disparaging message that other cooking sprays were harmful or unhealthy. (Case
       #4539, 8/07/06)

      NAD recommended that Mercedes-Benz modify or discontinue commercial that
       implies GL class automobile offers extraordinary safety and protection.
         – NAD noted that “NAD appreciates that humor can be an effective and creative
           means for an advertiser to highlight its product attributes and performance
           capabilities. However, humor does not relieve an advertiser of its obligation to
           support implied performance messages reasonably implied from humorous
           depictions.”
         – Mercedes-Benz to appeal decision. (Case #4538, 8/02/06)
                                NAD Update
 Lowest Price Guarantee
      NAD accepted Hotwire.com’s commercial as modified to include clear and conspicuous
       disclaimer (“Price Guarantee based on Hotwire’s Double the Difference Guarantee”) to
       qualify price comparison (“. . . Prices lower than any other travel site. Guaranteed.”).
         – NAD found that disclaimer was sufficiently clear and conspicuous, prominently
            displayed in large font on contrasting background without surrounding visuals or
            sounds, and legible. (Case #4546, 8/24/06)

 Compliance with Prior NAD Decision
      NAD to refer inquiry to FTC for possible action for Hoover Company’s failure to
       comply with prior NAD decision. NAD found failure to comply with prior decision as
       advertiser sought to qualify advertisement with additional disclaimer rather than
       discontinue claim. NAD made this decision despite acknowledging that the advertiser
       modified advertising to comply with NAD recommendations and removed previously
       challenged superiority claims from website and had made reasonable attempt to comply
       with NAD decision. (Case #4467C, 8/02/06).

      NAD determined that Schering-Plough Healthcare’s advertisement for Tinactin cream
       was not in compliance with earlier NAD decision and recommended that advertiser
       discontinue all express and implied speed of action claims. (Case #3723C, 8/29/06).
                            NAD Update
 Claim Substantiation
    Bacardi discontinued advertisement for Bacardi® Limón rum product with
     statement “Fewer Carbs. Fewer Crunches.” and “This flavorful cocktail is
     the perfect low-carb alternative for your active lifestyle.” NAD expressed
     concern that the advertisement included an implied claim that Low-Carb
     Bacardi® Limón can help in weight loss efforts and requested
     substantiation. (Case #4541, 8/9/06)

 Format for Presentation of Advertisement
    NAD recommended that internet banner advertisement by Bullseye Media,
     Inc. resembling technical warning or Windows system message be
     discontinued. Internet banner advertisement included Windows System
     Message and header “System Status: Your Urgent Attention Required.”
     Bullseye agreed to discontinue ad. (Case #4535, 8/01/06)
                               NAD Update
 Comparative Claims
      NAD determined that Procter & Gamble can support claims related to grease-
       fighting capability of Ultra Concentrated Dawn Original Scent Dishwashing liquid,
       but recommended that P&G modify “Best on Grease” claim. Evidence submitted
       by P&G supported claim of “best” on certain grease cleaning, but not a broad,
       unqualified “best on grease” claim. NAD recommended that P&G discontinue use
       of this claim and related claim or modify claim to more properly reflect evidence in
       the record. (Case #4532 7/26/06)
                            NAD Update
Additional Cases Referred to FTC
 NAD refers Freeman Beauty Labs to FTC for failure to respond to NAD
  inquiry. (Case #4543, 8/16/06)


 NAD refers ad for Debt Relief of America to FTC following advertisers refusal
  to discontinue claim in radio advertisement that service “can eliminate up to
  60% of your credit card debt.” NAD determined that the advertiser did not
  provide adequate support for claim and testimonial evidence did not reflect
  typical experiences. (Case #4536, 8/01/06)
                   CARU Decisions Update
 Disclosures must be clearly understandable
       CARU found that written disclosures in Major League Baseball
        sweepstakes promotion advertising for television, print and website were
        insufficient to meet the CARU guidelines. Television advertisement
        should include clear audio disclosures. Material disclosures in print and
        online advertising should be in type approximately equal in size and tone
        to statements regarding purchase requirement. (Case #4537, 8/01/06)


 Products and content inappropriate for children
       CARU found that airing of commercial for PG-13 rated film (Superman
        Returns) during programming directed to children under 13 violated
        CARU Guidelines. (Case #4542, 8/14/06)
                                        ERSP
 Matters referred by ERSP to the FTC:
        ERSP referred Herbal Group to the FTC over its SPAM email message and website
         advertising its supplement HoodiaLife as, among other claims, “The fastest, most
         effective weight loss supplement!” (August 22, 2006)

        ERSP referred Centro Natural De Salud to the FTC for advertising pertaining to the
         system “The Tratamiento Contra La Obesidad.” Among other questionable claims
         regarding the system, the advertisement touted the system’s “reducing soap” as
         being able to “… help[s] with flab around the stomach, chin, and arms area.”
         (September 5, 2006)

   ERSP noted that while Biolustre Inc.’s general efficacy claims pertaining to the
    Biolustre Revive Instant Hair Repair System were supported, Biolustre should modify
    other claims pertaining to the product until further studies can be performed to
    substantiate such claims. In addition, ERSP cautioned that performance claims should
    be consistent with study results relating to the product and that Biolustre should make
    additional disclosures or modify certain statements in its advertisements. (August 22,
    2006)
                                  ERSP
Additional Items of Interest
 ERSP administratively closed case file pertaining to advertising by Sinol
  USA, Inc. promoting its product, Sinol Headache Nasal Spray, as
  advertising claims at issue and issues relating to the ingredients contained
  in the product are the subject of pending litigation.

 ERSP determined that Iovate Health Sciences International (“Iovate”),
  marketers of the SmartBurn with Hoodia Weigh Loss Supplement,
  provided “a reasonable basis for all general performance and establishment
  claims as well as doctor and consumer testimonial claims.” On the other
  hand, ERSP recommended that Iovate modify certain other claims relating
  to the product. (September 5, 2006)

 ERSP determined that Iovate, marketers of the Accelis Weight Loss
  Supplement, provided “a reasonable basis for all general performance and
  testimonial claims” relating to the product. On the other hand, ERSP
  recommended that Iovate modify certain secondary claims relating to the
  product. (September 5, 2006)
                      Lanham Act Litigation
 Phoenix of Broward Inc. v. McDonald’s Corporation (N.D. Ga. August 1,
   2006):
   Plaintiff (a Burger King Franchisee) lacked prudential standing to bring a Lanham Act
   false advertising claim against McDonalds.
       Burger King franchisee claimed that McDonald’s ads relating to its promotional
        games (e.g. “Monopoly Game at McDonalds”) violated the Lanham Act and
        constituted false advertising (ads stated that customers had a fair and equal chance
        of winning game prizes, however, due to criminal acts of embezzlement such
        statements were false).
       McDonalds moved to dismiss on the following grounds: (i) franchisee lacked
        standing to bring the suit, (ii) criminal conduct severed McDonald’s liability, and
        (iii) franchisee failed to plead claim with required specificity.
       The Court adopted a multi-factor test to determine whether franchisee had standing
        to bring the Lanham Act false advertising claim and determined that the factors
        weighed against standing and, therefore, the Court dismissed the action.
       The Court did not address McDonald’s other arguments for dismissal.
                    Lanham Act Litigation
 R.J. Reynolds Tobacco Company v. Cigarettes Cheaper! (7th Cir. August
  24, 2006): Defendant’s sale of reimported products violated the Lanham Act.
     Cigarettes Cheaper! “reimported” cigarettes manufactured by R.J.
      Reynolds (and bearing Reynolds’ TMs) for sale in the U.S.
     R.J. Reynolds claimed that the sale of such reimported cigarettes violated
      the Lanham Act.
     Cigarettes Cheaper! argued their actions did not violate the Lanham Act
      because the “Lanham Act always permits the use in the United States of
      trademarks affixed by their proprietor.”
     The district court determined that the sale of such cigarettes would be
      unlawful if the domestic product was materially different from the
      reimported product. The jury concluded that the domestic and reimported
      products were materially different and awarded R.J. Reynolds damages of
      approximately $4M.
     The Court affirmed the jury’s verdict.
                    Lanham Act Litigation
 Microsoft filed several complaints on August 22, 2006 against individuals who
  registered hundreds of domain names using variations of Microsoft
  trademarks. Microsoft’s complaints are an effort to challenge the online
  business model of “domaining,” the action of registering domain names (often
  misspellings of famous marks) intended to lure traffic and clicks on
  advertisements on the website hosted by that registered domain. Complaints
  include claims under Lanham Act, Anticybersquatting Protection Act and state
  unfair business practices statutes.
           Consumer Protection Litigation
Enforceability of Class-Arbitration waiver provisions

    Tennessee Court of Appeals upheld class action arbitration waiver clause in
     American Express cardmember agreements. Spann v. American Express Travel
     Related Services Co., 2006 WL 2516431 (Tenn. Ct. App. Aug. 30, 2006).

    On Aug. 9, 2006, J. LaVecchia of the Supreme Court of New Jersey found that a
     class-arbitration waiver in a consumer contract was unenforceable due to the public
     interest at stake as the waiver is an unconscionable provision in a contract of
     adhesion. Court concluded appropriate remedy was to sever unconscionable
     provision and enforce remainder of a valid arbitration agreement. Muhammad v.
     County Bank of Rehoboth Beach, 2006 WL 2273448 (N.J.).

    On Aug. 9, 2006, J. LaVecchia of the Supreme Court of New Jersey also held that
     a class-arbitration provision was not unconscionable per se. The Court
     distinguished the prior case based on the nature and value of the contract and the
     damages sought. Delta Funding Corp. v. Harris, 2006 WL 2277984 (N.J.).
                           Miscellaneous

 Data Security News Update
 Spam and E-commerce
     Virginia Court of Appeals upholds state anti-spam law and affirms
      conviction of person sentenced to nine years in prison for spamming.
     Michigan AG sues companies who sent spam to Michigan kids.
      Complaints filed on August 10th allege companies sent spam to kids
      soliciting gambling opportunities and alcohol purchases in violation of
      state Children’s Protection Registry Act. Criminal charges were also filed
      against defendants in separate actions. (Cox v. RR Media, Mich. Cir. Ct.,
      Case No. 06-1006 and Cox v. Data Stream Group Inc., Mich. Cir. Ct.,
      Case No. 06-1007)
                      Miscellaneous
 Alaska Supreme Court affirms sanctions in deceptive advertising
  case for failure to participate meaningfully in discovery after
  being compelled to do so (Lee v. Alaska, Alaska, No. S-11396,
  August 11, 2006).
                                        Michael D. Hauser
                                                     404-881-4785
                                               michael.hauser@alston.com
   Michael Hauser is a partner in the Intellectual Property Transactional group and serves as the leader of Alston & Bird’s
    Advertising and Marketing team. Mr. Hauser concentrates his practice in the areas of marketing, advertising, licensing and
    high technology transactions, including the development, protection and exploitation of intellectual property, and the creation
    of strategic marketing and technology alliances.
   Mr. Hauser counsels clients in a variety of sports and entertainment transactions involving sponsorship, endorsements, and
    other promotional opportunities and advises on general marketing issues ranging from false advertising to brand
    management. Mr. Hauser’s broad experience includes the structuring and negotiating of marketing transactions with major
    sports and entertainment properties such as the Olympics, NASCAR, NFL, NBA, NHL, MLB, PGA, Warner Brothers, The
    Walt Disney Company and Time Warner.
   Mr. Hauser regularly assists clients with the development and implementation of their online and other marketing strategies.
    Services in this area include counseling on advertising claims and disclaimers, issues related to on-line games, contests, club
    memberships, and loyalty programs, privacy and data collection, linking practices and the analysis of state and federal laws
    governing electronic communications and marketing. In addition, Mr. Hauser advises on e-commerce business relationships,
    co-branding, cross-marketing and promotions, on-line retailing, website sponsorships and advertising sales and placements.
    Mr. Hauser also enables clients to leverage the power of emerging technologies to connect with their target markets through
    means such as audio and video streaming and storage, multimedia product development, wired and wireless online content
    distribution, and website design, development and hosting.
   Mr. Hauser’s intellectual property experience is also critical to a broad range of technology-driven transactions. Often these
    transactions take the form of strategic alliances, joint ventures, or intellectual property acquisition, development or licensing.
    Industries in which Mr. Hauser has experience include transportation, travel, logistics, sports and entertainment, gaming,
    advertising, telecommunications, and consumer products of various types.
   Michael received his J.D. and his A.B. from the University of North Carolina at Chapel Hill. He has been a frequent speaker
    on topics such as advertising, licensing, technology transactions and sports related issues. He is also listed in “The Best
    Lawyers in America.”
                                       Katherine Wallace
   Katherine Wallace is a member of the Intellectual Property Group. Katherine focuses her practice on advertising and marketing
    matters as well as a wide range of licensing and technology transactions involving the ownership and development of intellect ual
    property. This focus also includes general advice on the protection and enforcement of intellectual property, including counseling
    on licensing strategies for use and integration of licensed technology in products for commercial distribution, trademark
    enforcement and brand protection, online marketing activities, and strategic alliances. As a member of the firm’s Advertising and
    Marketing group and Electronic Entertainment Task Force, Katherine’s practice includes transactions and counseling in the areas
    of sports and entertainment properties, electronic entertainment and video game development and licensing, content licensing and
    publishing. Katherine has experience drafting and negotiating a diverse range of agreements, including: license agreements,
    sponsorship agreements, master advertising agreements, consulting agreements, technology services agreements, web site
    development and fulfillment agreements, publishing agreements, and marketing agreements. Katherine’s practice also involves
    counseling on a variety of promotional activities, including giveaways, contests, sweepstakes promotions, and telemarketing
    campaigns.

   Katherine received her B.S. in 1996 from the Georgia Institute of Technology. Katherine received her J.D., magna cum laude, in
    2000 from The University of Georgia School of Law, where she was an Articles Editor for the Georgia Law Review.

   Katherine is the co-author of an article entitled “Negotiating Development Contracts for Computer and Video Games.”

								
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