FTC Releases Revised Guides Governing Endorsements and Testimonials in Advertising

Federal Trade Commission, Press Release, October 5, 2009

Guides Concerning the Use of Endorsements in Advertising (the “Guides”):

Past Action:

As we reported in our January, 2009 Newsletter, the FTC sought public comment on the then-proposed revisions to the Guides.
At the time, the FTC was looking for input in the following areas:

consumer endorsements;
expert endorsements;
organization endorsements; and
disclosure of material connections between advertisers and endorsers.

Purpose of Final Guides:

The Guides are intended to give advertisers information on how to keep their endorsement and testimonial advertisements in sync with the Federal Trade Commission Act (the “Act”).

Revisions:

Any advertising that implies that a consumer’s experience with a particular product or service is typical, when in fact it is not, will be required to clearly disclose the results that a consumer may typically expect.
Advertisers may no longer simply include a disclaimer such as “results not typical.”
The Guides further add new examples illustrating the “material connections” between advertisers and endorsers that a consumer may not be aware of. The FTC provides the example of a blogger who receives cash or in-kind payment to review a product as something that would be considered an endorsement. Therefore, under the Guides, a blogger who endorses a product or service must disclose the material connections that it has with the seller.
Any paid endorsement is considered deceptive if it sets forth false or misleading claims.
The revisions also address celebrity endorsers. According to the Guides, celebrities have an obligation to disclose their relationships with advertisers when making endorsements outside the context of traditional ads, such as on talk shows or in social media.
Advertisers and endorsers alike will be liable for false or unsubstantiated claims made in an endorsement.

Guides -- Administrative Interpretations of the Law:

The FTC points out that the Guides are not binding law, but rather they are intended to help advertisers comply with the Act.
In any legal action challenging the use of testimonials or endorsements, the burden would be on the FTC to prove that the conduct was in violation of the Act.

Summary:

The published revisions to the Guides seem to cover a broad range of advertising methods.
Companies and individuals using testimonials and endorsements for advertising purposes should carefully familiarize themselves with the new Guides in order to avoid an FTC action under the Act.

Personal Opinion Posted on Website Not Defamation

Intellect Art Multimedia v. Milewski, 24 Misc. 3d 1248 (A),
2009 WL 2915273 (Sup. Ct. N.Y. County), 2009 Slip op. 51912 (U)
September 11, 2009

Facts:

Plaintiff runs a college summer program under the name Swiss Finance Academy (“SFA”), offering courses in finance, business consulting and entrepreneurship.
Defendant Matthew Milewski applied to SFA and began taking classes in July, 2008.
During one of his SFA classes, plaintiff alleged that Milewski was disruptive, rude and insulting to staff members and exhibited inappropriate behavior.
Because of this behavior and his failure to pay the full tuition, plaintiff expelled defendant from the summer program.

The Complaint:

Plaintiff brought an action for defamation against Milewski and Xcentric Ventures, LLC, the owner of "ripoffreport.com."
According to the complaint, Milewski posted comments on ripoffreport.com accusing plaintiff of being a “bait & switch company,” making “false promises” and being run by incompetent people.
In its claim against Xcentric, plaintiff alleged that it played a significant role in creating, developing and/or transforming the information provided by users of “Ripoff Report.”
Plaintiff indicated that Xcentric created defamatory headings for the users’ comments.
Both defendants moved to dismiss the defamation claims.

The Decision:

Defamation Claim Against Milewski

The court dismissed the defamation claim against Milewski, holding that “the challenged speech is merely an alleged statement of Milewski’s personal opinion about the quality of services provided by plaintiff.”
The court reviewed the following factors in distinguishing whether the challenged language was opinion or fact:

whether the language used has a precise meaning or whether it is indefinite or ambiguous;
whether the statement is capable of objectively being true or false; and
the full context of the entire communication or the broader social context surrounding the communication.

According to the court, Milewski’s statements revealed him to be a “disgruntled consumer.” The statements were “subjective expressions of consumer dissatisfaction with plaintiff . . . and personal opinion.”

Defamation Claim Against Website

The court held that plaintiff failed to sufficiently plead the allegedly defamatory statements “authored by Xcentric.”
Specifically, the court noted that although plaintiff “generally claims that Xcentric created defamatory headings for Milewski’s purported postings, plaintiff has failed to set forth the allegedly defamatory headings in the complaint."
The court further found that Xcentric would likely be protected under the following provision of the Communications Decency Act ("CDA"): “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”

Summary:

An action for defamation will fail if the court deems the challenged language to be mere opinion and not actual fact under the aforementioned factors.
The website owner was protected by immunity under the CDA.

Court Dismissed Challenge to Maine’s New Data Collection Law Citing Attorney General’s Pledge Not to Enforce

Maine Indep. Colls. Ass'n v. Baldacci, D. Me., No. 1:09-cv-00396-JAW
September 9, 2009

The Maine Law:

As reported in our September, 2009 Newsletter:

The Act, signed by Governor John Baldacci on June 2, 2009, was due to take effect on September 12, 2009.
The Act would have prohibited marketing campaigns directed at minors, both on-line and off-line.
The Act specifically proscribed: (1) the collection or use of health-related information and personal information of individuals under the age of 18 for marketing purposes without verifiable parental consent, and (2) the sale or transfer to a third party of health-related information or personal information of a minor if that information was unlawfully collected, individually identifies the minor, or will be used for "predatory marketing."

Lawsuit Challenging Law Filed:

On August 26, 2009, a group of plaintiffs, including representatives of Maine colleges, media outlets, and national publishers and marketers, sought a preliminary injunction to “stay” enforcement of the Act.
The plaintiffs claimed that the law violated the First Amendment and Dormant Commerce clause and would have a chilling effect on interstate commerce.

Stipulated Order of Dismissal:

The court agreed to dismiss the action (without prejudice) indicating that the plaintiffs had met their burden of establishing that the new law is over-broad in its reach and violates the First Amendment.
Under the stipulation, the State Attorney General, Janet T. Mills, pledged not to enforce the law.
The State Legislature will reconsider the legislation in January, 2010.

Summary:

Although the law still exists and provides a private right of action, the judge admonished that any individual lawsuits would probably be dismissed.
Marketers should be aware that while the Attorney General has promised not to bring an action under the current law, the Legislature plans to reconsider the law when it reconvenes in January, 2010.
We will report on any future changes to the Maine data collection law.

Dell Agrees to Pay $4 Million to Settle AG’s Fraud Charges

Cuomo v. Dell, Inc. N.Y. Sup. Ct., No. 3778-07
Office of the Attorney General, Press Release, September 15, 2009

Lawsuit Against Dell:

The New York Attorney General’s office ("AG") brought a proceeding against Dell, Inc. and Dell Financial Services (hereinafter “Dell”), for allegedly engaging in fraudulent, deceptive and illegal business practices concerning the sale, financing and warranty servicing of computers and related electronic equipment.
According to the New York AG, Dell allegedly used “bait and switch” advertising methods with respect to its “no interest” financing promotions, misled consumers to believe that they had qualified for promotional financing, failed to adequately disclose the terms of its “next day” service contracts and failed to provide consumers with warranty service and promised rebates.

Court’s Decision:

The court agreed with the AG’s claims that Dell had engaged in fraud, false advertising, deceptive business practices and abusive debt collection practices.
According to the AG’s office, the court concluded that Dell lured consumers to purchase its products with advertisements that offered “no interest” and/or “no payment” financing promotions when, in reality, most consumers, even those with very good credit scores, were denied these deals.
Dell then offered these rejected consumers financing at rates that often exceeded 20%.
The court further found that Dell incorrectly billed consumers on cancelled orders, returned merchandise or accounts that they did not authorize Dell to open, and then harassed consumers with illegal billing and collection activity.

Settlement:

Dell has agreed to pay the AG’s office $4 million in restitution, penalties and costs to settle these charges of fraudulent and deceptive business practices.
Going forward, Dell is required to clearly and fully disclose the terms and conditions associated with their products and services.
The Company will be required to fully disclose the specific terms of an “at home” or “on site” service contract to the consumer prior to purchase.
Dell must also disclose in its advertising for promotional financing the estimated percentage of consumers who will actually qualify for the promotion.

Summary:

The court’s decision and the ultimate settlement focused mainly on truthful and clear disclosure in advertising.
This action and settlement is one example of the AG’s continuing efforts to enforce New York State’s consumer protection laws.

Ninth Circuit Adopts National Community Standard for Obscenity Internet Spam Case

United States v. Kilbride, ___F.3d___, 2009 WL 3448360 (Ariz.)
October 28, 2009

Facts:

Defendants Jeffrey Kilbride and James Schaffer conducted a bulk email advertising business.
Advertisements appearing in defendants’ commercial email messages included sexually explicit images.
The bulk email sent by defendants failed to comply with applicable CAN-SPAM requirements by containing forged headers, fake email addresses and false contact information.
Defendants were convicted of criminal CAN-SPAM violations, and for violating two (2) federal obscenity laws by sending obscene images via email throughout the United States.
Defendants appealed.

Jury Instructions:

Defendants challenged the jury instructions concerning the test for determining whether a work is subject to regulation as obscenity.
After a thorough and meticulous review of the relevant U.S. Supreme Court decisions and the court's individual Justices’ review and interpretations of the correct standard, the Ninth Circuit affirmed the district court’s decision.
The court held that a national community standard “must be applied in regulating obscene speech on the Internet, including obscenity disseminated via email.”

Summary:

Many believe that defendants will appeal this decision to the U.S. Supreme Court and that there is a good chance the Court will grant certiorari.
We will continue to follow and report on any further developments.

Parties Stipulate to Drop Suit Against Utah Child Protection Registry - Judge Dismisses Action

Free Speech Coal., Inc. v. Shurtleff, No. 2:05-CV-949
September 30, 2009

Utah law at Issue:

Utah Child Protection Registry Act (the "Law"):

The Law established a State “Do-Not-Email” registry.
It allows parents or guardians of children in the State of Utah to register electronic “contact points” with the Utah Consumer Protection Division to prevent communications that are deemed “harmful to minors.”
A “contact point” includes an email address, an instant message identity, a mobile or other telephone number and a facsimile number.
According to the Utah Attorney General’s Office, the State registry allows parents to prevent pornographic pictures and solicitations from going to their children's email, cell phone, instant messaging account and/or fax number.
Under the Law, email marketers are required to determine whether any of the addresses on their email lists have registered with the Utah Registry.
In order to do this, marketers have to participate in the Registry’s “scrubbing” services to ensure they are not sending certain covered communications (advertisements for pornography, gambling, firearms, alcohol and tobacco) to minors.
The Law provides for civil and criminal penalties.

Lawsuit Filed in 2006:

The Free Speech Coalition brought an action for declaratory and injunctive relief challenging the constitutionality of the Utah Law.
The Utah District Court denied its motion for preliminary injunction which allowed the Law to take effect.
Plaintiff decided to withdraw its suit.
The judge dismissed the action with prejudice.

Summary:

According to the Utah Attorney General’s Office, more than 340,000 Utahns have signed up for the registry. The Attorney General, Mark Shurtleff, has indicated that his goal is to take the registry nationwide.
Email marketers need to ensure that any adult content that could be deemed “harmful to minors” is not communicated to a child’s email address, I.M. account or telephone number.
The Utah Registry provides a “scrubbing” service at the cost of $5.00 per 1,000 email addresses to ensure compliance with the Law.

Certain Fees for Web-Based Advertising Not Subject to Sales Tax

State of New York, Commissioner of Taxation and Finance, Advisory Opinion, Petition No. S040628B
September 24, 2009

Relevant (Anonymous) Facts:

Company X -- provides services over the Internet to its advertiser customers. Company X does not own or lease tangible personal property or real property in New York State. All of its offices, equipment and computer servers are located outside of New York State.
Advertisers -- typically retailers of tangible personal property that “hire” Company X to place advertisements on their Internet websites directing potential customers (or "Buyers") to Advertisers' sites.
Buyers

In this case, the Advertisers use banner ads. Buyers click on these banner ads and are directed to the Advertisers' websites.
Buyers can also search through Company X’s database of inventories from all Advertisers to find a particular item. If the correct item is found, Buyer is given a link which will either link Buyer directly to Advertiser’s website or provide the necessary contact information.

Advertisers enter into their own computer system and process information about their inventory which is automatically transferred to Company X’s website.
Company X’s website contains only the advertisement for the goods advertised and redirects the Buyer to the appropriate web page maintained by Advertiser or provides Buyer with shopping cart functionality.
Company X’s website has no purchase or shopping cart functionality.
Transactions between Buyer and Advertiser are handled by it, either on Advertiser’s website or by telephone.
Company X also provides customers with access to services on the Internet, such as sales and contact databases, made accessible through a web browser.
Company X further offers a product that adds functionality to a third-party Advertiser’s website.

Opinion:

Under this Opinion, fees charged for banner advertisements on a website are not subject to sales tax.
Monthly and non-recurring fees for advertising information carried on a website are also not subject to sales tax.
Regarding whether fees charged to support a customer’s website are subject to sales tax, the Opinion indicates that the point of delivery determines taxability. Only receipts attributable to Company X’s customers who receive the information from Company X in New York State would be subject to sales tax.

The advertisers subject to this Opinion include vendors of tangible personal property (Advertisers), leasing agents of multiple residential properties and lessors of residential properties (Agents and Owners), and individuals advertising items of tangible personal property for sale or residential properties for rental or lease.
The Opinion emphasizes that Company X’s website contains solely the advertising message for the goods and properties advertised and redirects Buyer to the appropriate web page maintained by the Advertiser, Agent, Owner or Individual.
Company X does not have any purchase or shopping cart functionality.

Applicability:

The State of New York, Commissioner of Taxation and Finance, has indicated in this Advisory Opinion that the Opinion is limited to the facts in this particular case. Please note that the Opinion is binding on the Department only with respect to the person and entity to whom it is issued and only on the described relevant facts.