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 27th 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. Hauser404-881-4785

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 intellectual 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.”