Proskauer on Advertising Law
Proskauer on Advertising Law

FTC and DeVry University Settle False Advertising Claims for $100M

In December 2016, DeVry University agreed to pay $100 million to settle a lawsuit with the Federal Trade Commission (FTC) over allegations stemming from DeVry’s advertising about the employment rates and salaries of its graduates. According to the FTC press release announcing the settlement in FTC v. DeVry Educ. Group in the district court for the Central District of California, DeVry will pay $49.4 million in cash to be distributed to students and $50.6 million towards debt relief programs to cover unpaid student loans and debts.

This dispute began in January 2015 when the FTC filed a lawsuit  in California federal court in Los Angeles against DeVry, alleging two areas of allegedly deceptive advertising. First, the FTC took issue with DeVry’s claim that 90% of all DeVry graduates who were actively seeking employment obtained jobs in their field of study within six months of graduation.  The FTC alleged that DeVry did not have a reasonable basis to support this claim since, in calculating this figure, DeVry included a substantial percentage of graduates who continued with the same job that they had at the start of their DeVry enrollment, and because DeVry unreasonably construed certain unrelated jobs as within a graduate’s “field of study.”  For example, according to the FTC, graduates with a “technical management” degree were all considered “in field” by DeVry when these graduates obtained jobs as a rural mail carrier, a driver who delivered rain gutters for a construction services company, and a sales associate at Macy’s.  Similarly, according to the FTC, a graduate with a degree in business administration who obtained a job as a server at the Cheesecake Factory was considered “in field” by DeVry.

Second, the FTC took issue with DeVry’s claim that its graduates earned fifteen percent more than graduates with bachelor’s degrees from all other colleges and universities.  Again, the FTC alleged that DeVry did not have a reasonable basis to support this higher income claim because DeVry substantiated this claim through an income report received from a third party company in 2012 that did not account or adjust for significant salary drivers (like age, experience, and field of degree) and which included findings that differed significantly from DeVry’s own collected information.  Further, the FTC claimed that publicly available information did not corroborate this claim.

Under the terms of the settlement, DeVry agreed to refrain from future mischaracterizations of its educational products or services. DeVry agreed to stop including jobs that students obtained before purchasing any DeVry educational service or that students acquired more than six months prior to graduation in their advertising claims about the ability of its graduates to find jobs following graduation.  Further, the settlement prevents DeVry from misrepresenting a student’s ability to obtain a job in his or her “field of study.”  In addition, the settlement prevents DeVry from making any express or implied representation about the benefit or success of its services unless that data is non-misleading and relies upon competent and reliable evidence.  Such evidence requires “tests, analyses, research, studies, or other evidence” relying on expertise of professionals and conducted in an objective manner through generally accepted procedures.  To help ensure compliance, the settlement also requires DeVry to implement a training program designed to ensure that employees do not make a future representation that is prohibited by the settlement.

The size of the monetary relief—$100 million—is eye-catching and represents one of the largest FTC settlements in a false advertising case that we have covered on this blog. With such a loud victory for the FTC, we may see the Commission’s interest towards for-profit higher education institutions grow in the near future.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at lweinstein@proskauer.com /212-969-3240 or akaplan@proskauer.com /212-969-3671. We are editors of Proskauer on Advertising Law and partners in Proskauer’s False Advertising & Trademark practice.

California Court Issues Surprising Decision in Discount Advertising Case

On December 15, 2016, the California Court of Appeals in Los Angeles came to a surprising summary judgment decision in Sajid Veera et al. v. Banana Republic, LLC.  The court held that plaintiffs who claimed they were misled by 40% off signs raised a triable issue of whether they suffered an injury-in-fact even though they knew that the items they were purchasing were not on sale before purchasing them.

The Banana Republic plaintiffs alleged that they were “lured” into Banana Republic stores by window signs advertising a 40% off discount, without apparent limit.  However, plaintiffs alleged that the discount was actually limited to certain goods in the store, not all goods, and that Banana Republic store personnel did not inform the plaintiffs that the items they had chosen were not 40% off until plaintiffs reached the register, although before plaintiffs purchased the goods.  “Embarrassed” by the long line at the register and “humiliated,” one plaintiff claimed to have purchased at full price a new outfit her daughter had worn out of the dressing room, while electing not to purchase other items to which the 40% off sale did not apply.  Another plaintiff claimed to have purchased a sweater at full price after learning it was not on sale, while choosing not to go ahead with the purchase of other previously-selected items, because he was “annoyed and very embarrassed” and felt that “to leave with nothing would be a complete and utter waste of energy and time.”

Banana Republic moved for summary judgment, arguing that plaintiffs could not establish that they were economically injured as a result of the allegedly misleading advertising, due to their discovery of the true facts prior to purchase, and therefore lacked standing.  The trial court granted Banana Republic’s motion.

To establish standing under California’s Unfair Competition Law (UCL) or False Advertising Law (FAL), a plaintiff must have suffered “economic” injury – “lost money or property” – as a result of the defendant’s allegedly unfair business practice or false advertising.  In addition, a UCL claim that argues that the defendant “engaged in misrepresentations and deceived consumers” requires a showing of reliance on the allegedly deceptive or misleading statements.

The appeals court reversed the trial court’s dismissal of the case and found that plaintiffs had raised triable issues of fact as to (1) whether they suffered economic harm, and (2) whether reliance on the allegedly misleading advertising caused their claimed economic harm.  If plaintiffs’ claims were true, the court reasoned, Banana Republic illegally sold them items using “a type of ‘bait and switch’ advertising,” luring consumers toward a decision to buy and revealing the deception only after the consumer was “invested in the decision to buy and swept up in the momentum of events.”  The plaintiffs’ economic harm would be the difference between the advertised sale price and the full price paid.

Presiding Judge Tricia Bigelow dissented, disagreeing that plaintiffs’ allegations constituted a bait-and-switch scheme and stating that the plaintiffs could not establish causation, economic injury, or reliance on the 40% off representation.  She wrote that she was “aware of no legal authority” suggesting that a plaintiff’s embarrassment or frustration is relevant to a determination of reliance, where the plaintiff knew the true facts before consummating the allegedly injurious transaction.  While she was “sympathetic to the concern” that some misleading advertising claims would go unprosecuted under this standard, the “law as it stands” did not permit any other conclusion.  “I expect the court’s decision will invite exhaustive litigation,” she wrote.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at lweinstein@proskauer.com /212-969-3240 or akaplan@proskauer.com /212-969-3671. We are editors of Proskauer on Advertising Law and partners in Proskauer’s False Advertising & Trademark practice.

Proskauer’s Larry Weinstein Discusses Implications of Bautista v. Cytosport in Legal NewsLine Article

Last week, this blog covered the slack-fill decision in Bautista v. Cytosport, Inc., 2016 WL 7192109 (S.D.N.Y. Dec. 12, 2016), in which the court dismissed the putative class action complaint for failure to allege non-conclusory facts. Larry Weinstein, co-head of Proskauer’s False Advertising & Trademark practice, was quoted at length in Legal NewsLine discussing the implications of the decision. The article may be read here.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at lweinstein@proskauer.com /212-969-3240 or akaplan@proskauer.com /212-969-3671. We are editors of Proskauer on Advertising Law and partners in Proskauer’s False Advertising & Trademark practice.

When the Strength of the Facts Cannot be Lifted – SDNY Dismisses Muscle Maker Slack-Fill Class Action

The Southern District of New York recently dismissed a putative class action against Cytosport, the maker of Muscle Milk protein powder. The plaintiff, Orlando Bautista, alleged that he bought a container of Muscle Milk protein powder for $28 but was “surprised and disappointed” to discover that the package contained roughly 30% empty space. The suit claimed violations of New York state consumer fraud laws, fraud, negligent misrepresentation, and unjust enrichment for allegedly selling Muscle Milk protein powder with “nonfunctional slack-fill.”

The plaintiff alleged that the empty space in Muscle Milk containers constituted nonfunctional slack-fill under the federal Food, Drug, and Cosmetic Act (“FDCA”) regulations, and claimed a violation of the New York Deceptive Trade Practices Act. Judge Seibel dismissed the case without leave to amend because the plaintiff’s conclusory allegations provided no factual basis to state such a claim. The court cited the Northern District of California’s recent dismissal of another slack-fill case, Bush v. Mondelez Int’l, for the point that merely reciting the FDCA’s safe harbors is insufficient to state a consumer deception claim. The court found that plaintiff’s assertion that the 30% empty space was not used “to protect product, necessary for enclosing the product, or because of settling,” was unsupported by facts and stated in a conclusory fashion.

The plaintiff’s fraud claims were similarly dismissed because he failed to plead facts about the “materially false and misleading representations regarding the size, volume, and contents of the product” with particularity and sufficient plausibility. Additionally, the negligent representation claim was dismissed because the transaction between Cytosport and the plaintiff did not establish a “special relationship” and the complaint failed to plausibly allege that the slack-fill was nonfunctional. Finally, the court dismissed the unjust enrichment claim as being duplicative of the other causes of action.

Plaintiff filed his initial complaint in November 2015 and subsequently twice amended. Judge Seibel declined to grant leave to amend again sua sponte because the plaintiff failed to cure deficiencies in prior pleadings, did not ask to amend again, and did not appear to be in possession of facts that would cure the pleading deficiencies.

The Muscle Milk suit is the latest in a series of slack-fill lawsuits that have arisen in the past few years. Judge Seibel’s decision highlights the need to allege non-conclusory facts to state a plausible claim at the pleading stage in these slack-fill suits to avoid being crushed by the weight of dismissal.

The case is Bautista v. Cytosport, Inc., 2016 WL 7192109 (S.D.N.Y. Dec. 12, 2016).

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at lweinstein@proskauer.com /212-969-3240 or akaplan@proskauer.com /212-969-3671. We are editors of Proskauer on Advertising Law and partners in Proskauer’s False Advertising & Trademark practice.

Update on Second Circuit Ruling in Church & Dwight v. SPD Swiss Precision Diagnostics “Weeks Estimator” Home Pregnancy Test Litigation

Last month we summarized the Second Circuit’s important decision in a dispute between plaintiff-appellee Church & Dwight and its principal competitor, defendant-appellant SPD Swiss Precision Diagnostics, concerning SPD’s false advertising of its Clearblue Weeks Estimator Home Pregnancy Test.  As we reported, a Second Circuit panel in September unanimously affirmed rulings by Judge Alison Nathan of the Southern District of New York (i) that SPD was liable for “intentional” and “egregious” false advertising, and (ii) ordering permanent injunctive relief that included a nationwide recall of Weeks Estimator packaging that the district court found to be misleading.  Following the panel’s decision, SPD petitioned the Second Circuit for rehearing by the panel or, in the alternative, rehearing en banc.

In its petition, SPD argued that the panel erred by declining to hold that Church & Dwight’s Lanham Act claim was precluded by the FDA’s regulation of the Weeks Estimator’s labeling through the Food, Drug & Cosmetics Act (FDCA) § 510(k) process.  SPD contended that a 2011 Supreme Court decision called PLIVA v. Mensing was the controlling authority on this issue, not the Supreme Court’s subsequent 2014 decision in POM Wonderful v. Coca-Cola on which the panel relied, despite that POM Wonderful expressly held that Congress did not intend for the FDCA to preclude Lanham Act false advertising claims, whereas PLIVA concerned state tort law preemption, not federal preclusion.  SPD also argued that the panel decision was inconsistent with the decision of another Second Circuit panel in Apotex v. Acorda Therapeutics, 823 F.3d 51 (2d Cir. 2016), decided a few months before the panel decision in the SPD case.  Finally, SPD’s rehearing petition also disputed the panel’s agreement with the district court’s reliance on a survey Church & Dwight offered concerning the messages communicated by SPD’s current Weeks Estimator package.

None of SPD’s rehearing arguments proved successful, as earlier this month, SPD’s petitions for panel and en banc rehearing were denied without reported dissent.

Shortly after the rehearing petition was denied, the panel amended its earlier opinion to specifically address the Apotex decision, which SPD never raised while its appeal was pending before the panel. The panel first noted that Apotex had recently settled the Circuit’s materiality standard to require a showing that deception resulting from a false advertisement is “likely to influence purchasing decisions.”  The panel explained that Apotex had “no effect on [the panel’s] determination, as [the panel’s] analysis [in the original appeal decision] assume[d] that the standard [was] exactly as Apotex decided.”

The panel also added a footnote explaining why Apotex, which held that “representations commensurate with information in an FDA label generally cannot form the basis for Lanham Act liability,” was entirely compatible with its decision that Church & Dwight’s Lanham Act claim was not precluded by the FDCA.  First, the panel noted that Apotex expressly left open that “Lanham Act liability might arise if an advertisement us[ing] information contained in an FDA-approved label . . . [is] literally or implicitly false.”  As the district court found and the panel affirmed, SPD’s advertising was literally and/or impliedly false.

Second, the panel observed that Apotex assumed the ability in a Lanham Act case to determine whether certain FDA-approved factual assertions were false, whereas this case concerned Church & Dwight’s right to challenge SPD’s FDA-cleared messaging in the first place, and that the Supreme Court’s POM Wonderful decision, which Apotex did not cite, made clear that Church & Dwight had that right.  Finally, the panel pointed out that Apotex implicated a different aspect of the FDA’s competence than the case at hand.  In Apotex, the Court deferred to the FDA’s expertise concerning and exhaustive review of whether a drug had certain pharmacological effects.  This case, on the other hand, involved “the question of whether the phrasing of advertising messages might be misunderstood by consumers,” which was not an issue where the FDA’s competence vastly exceeds that of courts.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at lweinstein@proskauer.com /212-969-3240 or akaplan@proskauer.com /212-969-3671. We are editors of Proskauer on Advertising Law and partners in Proskauer’s False Advertising & Trademark practice.

 

Second Circuit Affirms Preliminary Injunction of “Identical” Gray Goods

The Second Circuit recently affirmed a district court’s grant of a preliminary injunction halting the alleged sale of gray-good diabetes test strips made by Abbott Laboratories under the “Freestyle” trademark.  The decision is notable because the authentic test strips were identical to the gray-good versions.

Read more here.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at lweinstein@proskauer.com /212-969-3240 or akaplan@proskauer.com /212-969-3671. We are editors of Proskauer on Advertising Law and partners in Proskauer’s False Advertising & Trademark practice.

IntenseX False Advertising Claims Lack Power and Performance

Last month, in Kanfer v. Pharmacare US, Inc., U.S. District Judge Marilyn Huff of the Southern District of California dismissed on what were essentially puffery grounds a consumer suit styled as a class action alleging that defendant PharmaCare falsely advertised its nutritional supplement, IntenseX, as an aphrodisiac that “would improve. . .sexual power and performance.” This decision contrasts with another decision we covered two years ago in which a judge in the Central District of California held that claims for a sex enhancement pill were not mere puffery.

The IntenseX packaging at issue contained statements including “Sexual Power and Performance,” “Fast Acting!” and “designed to intensify your endurance, stamina, and sexual performance.”  PharmaCare moved for summary judgment asserting that these statements were too vague and generalized to be actionable.

The court agreed, finding that it was simply not plausible that a significant portion of the public would be misled by the vague claims on the IntenseX label.  In reaching its decision, the court emphasized that a “[p]laintiff has a claim for false advertising only to the extent the product claims are false or misleading, as opposed to merely unsubstantiated.”  The plaintiff’s own expert admitted that the “vague language” regarding the effects of IntenseX “remain[ed] scientifically undefined and therefore untestable.”  The court determined that this “untestability” presented an insurmountable hurdle to plaintiff’s advertising claims.

The court also rejected the plaintiff’s claims related to statements on the IntenseX website because the plaintiff admitted that he did not look at the IntenseX website before purchasing the product.

Judge Huff previously denied PharmaCare’s motion to dismiss the lawsuit.  Then in June, the court denied class certification finding problems with the proposed nationwide class, including difficulties with reliance, standing, statute of limitations, and damages.  Just last week, plaintiff filed a notice of appeal of the court’s latest decision to the Ninth Circuit. Watch this space for further developments.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at lweinstein@proskauer.com /212-969-3240 or akaplan@proskauer.com /212-969-3671. We are editors of Proskauer on Advertising Law and partners in Proskauer’s False Advertising & Trademark practice.

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