In a recent public comment addressed to the United States Copyright Office, the Federal Trade Commission seemingly expanded upon remarks made at the National Advertising Division back in September that it will aggressively and proactively challenge alleged unfair practices involving artificial intelligence, even if that means stretching the meaning of “unfair” to increase its jurisdiction over such matters.
Read the full post on Proskauer’s Minding Your Business blog.
This past Friday, the Second Circuit reversed a lower court’s denial of a motion to compel arbitration in a putative consumer class action against fintech company Klarna. Edmundson v. Klarna, Inc., Case No. 22-557-cv (2d Cir. Nov. 3, 2023). The panel upheld the enforceability of Klarna’s “click-wrap” mandatory arbitration provision incorporated in Klarna’s terms and conditions. This precedential decision comes amid a surge in putative class actions targeting online services including, for example, subscription programs subject to state auto-renewal laws. For companies that have arbitration clauses in their website user agreements, Edmundson is another tool in the kit to help deter and defeat class actions.
The enforceability of an arbitration clause is a question of contract law and turns on whether the parties assented to the contractual terms. Plaintiffs in these types of cases involving online clickwrap provisions—where consumers accept terms by clicking a button or checking a box—often argue a lack of mutual assent on the basis that the terms of service containing the arbitration clause were allegedly not clearly visible. But the Second Circuit maintains that even absent evidence that a consumer had actual knowledge of the clickwrap terms, the consumer will be bound if (1) notice of the terms was displayed conspicuously enough such that a reasonably prudent person would be on inquiry notice of the terms, and (2) the consumer unambiguously manifests assent through conduct that a reasonable person would understand to constitute assent.
Klarna is a web service that offers shoppers the option to “buy now, pay later.” Plaintiff filed a putative class action alleging that Klarna misrepresented and concealed the risk of facing bank overdraft fees when using that service. When signing up for Klarna’s service, consumers are asked to assent to Klarna’s terms of service, which include a mandatory arbitration clause. Klarna moved to arbitrate plaintiff’s claims, alleging that plaintiff agreed to Klarna’s terms of service at various different points, including when she used a Klarna checkout “Widget” to finalize an online purchase. The district court denied Klarna’s motion to arbitrate, finding that plaintiff did not have reasonably conspicuous notice of and did not unambiguously manifest assent to Klarna’s terms of service, and therefore plaintiff was not bound by the mandatory arbitration clause in those service terms. The Second Circuit reversed and upheld the enforceability of Klarna’s arbitration clause.
First, the panel found the Klarna Widget provided reasonably conspicuous notice of Klarna’s terms of service (and thus the arbitration clause contained therein), sufficient to provide inquiry notice. The Court emphasized that the Widget interface, shown below, is “uncluttered,” the only link it provides is to Klarna’s terms of service, and the consumer is presented with only one button to click: “Confirm and continue.”
The Court noted that this content was all “visible at once,” without needing to scroll down to find notice of Klarna’s payment terms, and since the hyperlink appears directly above the “Confirm and continue” button, a reasonable internet user “could not avoid noticing the hyperlink to Klarna’s terms when the user selects ‘Confirm and continue’ on the Klarna Widget.” The Court further noted that the hyperlink to the terms is set apart from the surrounding information by being underlined and in a color that stands in sharp contrast to the background.
Second, the Court found that plaintiff unambiguously manifested assent to the terms of service by clicking the Widget button to “Confirm and continue.” Specifically, the Court found that reasonable internet users would understand that clicking that button constitutes confirmation that they “agree to the payment terms” as stated conspicuously directly above the button. Conversely, it would be unreasonable for an internet user to see the clear and conspicuous statement, “I agree to the payment terms,” with the button marked “Confirm and continue” directly under it, and not understand that the button is the mechanism by which the user confirms his or her agreement to the linked terms. The Court also pointed to the fact that plaintiff “could not have reasonably believed that the information set forth on the Klarna Widget above the hyperlinked ‘payment terms’ represented all the terms governing her use of Klarna’s service,” and therefore was on inquiry notice that her “agree[ment] to the payment terms” necessarily encompassed more, “and the burden was then on her to find out to what terms she was accepting.” The Court thus held that plaintiff “unambiguously manifested her assent to Klarna’s terms” and, “as a matter of law, [plaintiff] agreed to arbitrate her claims against Klarna.”
The Second Circuit’s decision in Edmundson could not come at a better time for companies who provide online services, including those with auto-renewing subscription programs. Class actions targeting such services have been on the rise, with plaintiffs’ attorneys demanding unrealistic levels of conspicuousness for hyperlinked terms of service. This decision rejects the plaintiffs’ bar’s extreme position and confirms that the practices employed by many companies suffice to put reasonable consumers on notice that they are agreeing to terms of service—including arbitration clauses contained therein—by proceeding with a transaction. Of course, whether arbitration clauses are best for your business should be assessed with counsel, to weigh their benefits against the risk of mass arbitrations.
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This week the FTC announced that it finalized its revisions to the Endorsement Guides, which give advertisers guidance on ensuring that their use of endorsements or testimonials complies with the FTC Act. At the same time, the FTC also announced an updated accompanying guidance document, “FTC’s Endorsement Guides: What People are Asking.” While the revised Endorsement Guides still require advertisers to comply with the requirements we previously discussed in our On Notice series, they feature several key additions addressing technological changes in how advertising is conducted, and advertisers’ increased reliance on online reviews, social media, and influencer endorsements.
Some key updates to the Endorsement Guides are described below.
Increased Focus on Online Consumer Reviews
The updated Endorsement Guides specify that advertisers should refrain from “procuring, suppressing, boosting, organizing, publishing, upvoting, downvoting, or editing” consumer reviews of their products in a way that distorts or otherwise misrepresents their products. They also include new guidance on the use of incentivized consumer ratings or reviews. Specifically, the updated Endorsement Guides state that even if an incentivized review is accompanied by a sufficiently clear and conspicuous disclosure, “the practice could still be deceptive if the solicited reviews contain star ratings that are included in an average star rating for the product and including the incentivized reviews materially increases that average star rating.” In such cases, the average star rating would also need to include a clear and conspicuous disclosure.
These additions reflect the FTC’s increased focus on combating deceptive online reviews – a focus it has made clear in recent years through guides for businesses publishing online reviews (Guide for Marketers, Guide for Platforms) and actions against advertisers alleging they posted false positive reviews or suppressed negative reviews. For example, earlier this month, the FTC reached a $4.2M settlement with Fashion Nova, an online fashion retailer, in a case alleging that Fashion Nova suppressed negative reviews from its website.
Based on the FTC’s past guidance, when soliciting and paying for online reviews, companies should avoid:
(1) asking “for reviews from people who haven’t used or experienced the product or services”;
(2) asking “your staff to write reviews for your business”;
(3) asking family and friends for reviews; and
(4) conditioning any incentive to submit a review on the review being positive.
Further, advertisers should not impose additional barriers to reviews or discourage consumers from submitting a negative review instead of a positive one. For example, if an advertiser does not require a consumer posting a positive review to include their date of purchase, the advertiser should not require a consumer posting a negative review to include their date of purchase either.
Expanded Definitions of “Endorser” and “Endorsement”
The revised Endorsement Guides update the definition of “endorser” to include virtual influencers, such as avatars or digital characters, and update the definition of “endorsement” to include fake reviews, statements by virtual influencers, and tags in social media.
These expanded definitions reflect the rapidly changing technological landscape in which advertising is taking place. The FTC’s inclusion of virtual influencers, in particular, will likely become increasingly important as brands continue to explore the use of AI in marketing. While virtual influencers are not all that common yet, many believe this trend may be the future of social media advertising. One particularly famous virtual influencer, Lil Miquela (a brand ambassador for teen retailer PacSun) currently has almost 3 million followers on Instagram, and was named one of Time Magazine’s “25 Most Influential People on the Internet.”
New Definition for “Clear and Conspicuous”
As in past versions of the Endorsement Guides, the updated Guides also require that material connections be “clearly and conspicuously” disclosed. But unlike in past versions, the updated Guides include a definition for what does (and does not) constitute a “clear and conspicuous” disclosure. Specifically, the updated Guides clarify that for a disclosure to be “clear and conspicuous” it must be “difficult to miss (i.e., easily noticeable) and easily understandable by ordinary consumers.” On social media or the internet, the disclosure must be “unavoidable.” The FTC further explains that the disclosure must match the format of the accompanying endorsement. If the endorsement is made visually, the accompanying disclosure must also be made visually; if the endorsement is made audibly, the disclosure must be made audibly. And if the endorsement is made both audibly and visually, the disclosure must be made in the ad’s visual and audio portions.
The new Endorsement Guides also instruct that for a visual disclosure to be “clear and conspicuous,” it must stand out from accompanying text or other visual elements “by its size, contrast, location, the length of time it appears, and other characteristics,” so that it is “easily noticed, read, and understood.” For an audio disclosure to be “clear and conspicuous,” it must be “delivered in a volume, speed, and cadence sufficient for ordinary consumers to easily hear and understand it.”
The new Endorsement Guides further clarify that advertisers may not simply rely on a social media platform’s built-in disclosure tool, if the disclosure provided by that tool is not “clear and conspicuous.”
All these requirements are consistent with the FTC’s past guidance on the use of endorsements on social media. For further discussion of what constitutes a “clear and conspicuous” disclosure under FTC guidance, see our past post on this topic.
Liability for Endorsers and Intermediaries
Though the previous version of the Endorsement Guides made it clear that advertisers could be liable for deceptive advertising by their endorsers or influencers, the updated Guides clarify that the endorsers or influencers, themselves, and intermediaries (like ad agencies and PR firms) may also be liable for making deceptive endorsements. For instance, the FTC added an example in which an influencer who did not limit their statements to their personal experience using a product and did not have a reasonable basis for their broad claim about a product’s efficacy would be subject to liability for the misleading or unsubstantiated representation in the endorsement.
This addition perhaps does not come as a surprise, in light of the FTC’s recent warning letters to individual influencers accused of making deceptive endorsements, which stated that “[i]ndividual influencers who fail to make adequate disclosures about their connections to marketers are subject to legal enforcement action by the FTC.” Nonetheless, it’s an important reminder that everyone involved in the creation of an ad (marketers, agencies, and influencers, alike) has a responsibility to make sure that material connections have been disclosed, and that the endorsement is not otherwise deceptive or misleading.
Special Guidance for Endorsements Directed at Children
The updated Endorsement Guides contain a new section aimed specifically at endorsements in advertisements addressed to children. The Guides state that such endorsements may be of “special concern,” due to the “character of the audience.” As a result, “[p]ractices that would not ordinarily be questioned in advertisements addressed to adults might be questioned in such cases.”
This addition seems to echo recent concerns about the potential effects of social media and influencer advertising on children and teenagers. Marketers whose ads may be aimed at children (or even if not expressly or solely aimed at children, may appeal to children) should be particularly careful with respect to the use of endorsements, reviews, and testimonials.
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While the modernized Endorsement Guides do include many key changes, none are all that surprising in light of the past FTC guidance, warning letters, and actions we have discussed on this blog. Watch this space for best practices on using endorsements and testimonials in advertising, and for updates on actions brought under the new Endorsement Guides.
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Judge Richard Seeborg of the Northern District of California recently dismissed a putative class action alleging that Sprout Foods’s nutritional claims on its baby and toddler food labels misled consumers into believing that the products provide physical health benefits. In their complaint, plaintiffs alleged that the products are “harmful both nutritionally and developmentally” due to allegedly high levels of free sugars. In rejecting these claims, the Court found that plaintiffs’ allegations were based on speculative research findings and hypothetical scenarios, which did not adequately allege that defendant’s products are per se harmful. Davidson v. Sprout Foods Inc., No. 22-cv-01050-RS (N.D. Cal. Oct. 21, 2022).
Pointing to statements such as “3g of Protein, 4g of Fiber and 300mg Omega-3 from Chia ALA” and other “nutrient content claims”, plaintiffs alleged that the products’ advertising communicate health benefits for developing children. Using this interpretation as a springboard, Plaintiffs alleged that the products’ advertising is false and misleading because the products contain high amounts of free sugars and are stored in pouches, which plaintiffs allege may be harmful to developing children.
In dismissing these claims, the Court found that plaintiffs failed to describe “at what point ‘high’ sugar content crosses into harmful levels (or even why, in particular, these sugar levels are harmful).” And for their allegations that pouched food may be unhealthy, plaintiffs relied on speculative research findings – for example, that pouches “may lead to long term health risks” or may be harmful if overly relied on by parents. Plaintiffs also did not allege why the purported risks outweighed any potential benefits of the products, such as providing protein or fiber to consumers. Noting that a California Court of Appeal has cautioned against allowing lawsuits to go forward that “rely on inferential leaps and which could ultimately place almost any advertisement truthfully touting a product’s attributes at issue for litigation,” the Court found plaintiffs failed to plausibly allege that the product labels here were false or misleading.
The plaintiffs’ bar is widely targeting health claims, including claims that foods and other goods may pose health risks because they allegedly contain certain ingredients or contaminants. This case serves as a helpful reminder that it is often the dose that makes the poison, and it is not enough for plaintiffs to allege the mere presence of a substance, and speculative possible health risks that may result, to state a claim.
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Please join us on Tuesday, September 13, for a Proskauer panel at ANA covering the latest legal developments related to environmental advertising claims. Our panelists, Jeff Warshafsky, Jennifer Yang, and Nicole Sockett, will discuss carbon offsets and lifecycle assessments, recyclability and recycled content claims, general environmental benefit claims, and other key takeaways from the FTC Green Guides, the NAD, and the courts. You can register for the event with ANA here: Environmental Claims: Latest Legal Developments | Webinars | Events & Webinars | ANA.
It has been almost forty years since Bruce Springsteen first famously celebrated being “Born in the USA.” From an advertising industry perspective, this song’s lasting popularity is no surprise; as advertisers know, “Made in the USA” is often a selling point for American industries.
The FTC knows this too. In late 2021, the FTC finalized a new rule cracking down on deceptive or misleading unqualified U.S. origin claims. The FTC’s new rule, which went into effect on August 13, 2021, does not create new substantive requirements for advertisers, but gives the FTC the ability to impose new, substantial monetary penalties for violating the rule.
Following the enactment of this rule, we have seen a rising number of class actions targeting place of origin claims. This post discusses some such class actions, as well as the FTC’s enforcement of its new rule.
FTC Rule On Unqualified “Made in the USA” Claims
The FTC’s rule prohibits marketers from making unqualified U.S.-origin claims unless:
This rule differs from the FTC’s prior guidance because:
Note that qualified U.S.-origin claims are not covered by this new rule, and are still subject to the FTC’s prior guidance.
FTC Enforcement Efforts Following Enactment of Rule
Under the new rule, the FTC has brought claims against:
Consumer Class Actions
The consumer class action space has seen challenges to similar “Made in USA” claims, including in recent cases against New Balance sneakers (Cristostomo v. New Balance Athletics, Inc., No. 21-cv-12095 (D. Mass. Dec. 20, 2021)), Genfoot America boots (Jackson v. Genfoot America, Inc., No. 22-cv-00036 (D.N.H. Jan. 28, 2022)) and Reynolds’ plastic wrap (Shirley v. Reynolds Consumer Products, No. 22-cv-00278 (N.D. Ill. January 17, 2022)). A recent class action was filed against American Tuna Inc. for its claims that tuna products are “caught and canned” in the United States. Craig v. American Tuna, No. 22-cv-00473 (S.D. Cal. Apr. 8, 2022). Land Air Sea Systems, Inc. is facing a similar lawsuit for marketing its GPS devices as “USA Manufactured.” Pinter v. Land Air Sea Systems, No. 22-cv-00185 (E.D.N.Y. Jan. 12, 2022).
Other Active “Place of Origin” Lawsuits
Place of origin claims, of course, are not limited to “Made in the USA.” Recent cases have challenged advertising claims that products are made in other places, such as:
In deciding whether complaints state a plausible claim that reasonable consumers are deceived by such advertising, courts tend to distinguish between claims explicitly touting that a product has been “made in” a certain location versus claims that merely tend to evoke a certain locale. For example, in a recent case involving King’s Hawaiian rolls, the court found that a mere reference to “Hawaii,” even when combined with imagery that evoked references to Hawaii, did not deceive reasonable consumers into thinking that King’s Hawaiian made its rolls in Hawaii. Hodges v. King’s Hawaiian Bakery W. Inc., No. 21-cv-04541-PJH, 2021 U.S. Dist. LEXIS 215707 (N.D. Cal. Nov. 8, 2021). The court in Steinberg v. Icelandic Provisions, Inc., No. 21-cv-05568, 2022 U.S. Dist. LEXIS 13478 (N.D. Cal. Jan. 25, 2022) reached a similar decision, finding that “heirloom Icelandic Skyr cultures” and advertisements created in Iceland did not mislead consumers into thinking the yogurt was made in Iceland, particularly since the product label indicated it was manufactured in New York.
When evaluating product claims for litigation risks, advertisers should keep in mind this distinction between claims that refer to or evoke imagery of a location, and claims that state the product was sourced in a location. We will continue to watch this space for further developments.
Other Developments in U.S.-Origin Labeling
The new FTC rule is not the only significant development surrounding U.S.-origin claims. Immediately following the FTC’s decision to strengthen regulations surrounding these claims, Agriculture Secretary Tom Vilsack released a statement indicating the USDA intends to “complement” the FTC’s efforts by “initiating a top-to-bottom review of the ‘Product of USA’ label” in order to “determine what that label means to consumers.” The review appears to be ongoing. This past February, the USDA announced “a web-based survey/experiment to help gauge consumer awareness and understanding of current ‘Product of USA’ labeling claims on meat (beef and pork) products and consumer willingness to pay (WTP) for meat product labeled as ‘Product of USA’ using the current and potentially revised definitions of the claim.” And more recently, the House and Senate have considered proposed legislation that would limit “Product of USA” labels to beef products that are born, raised, and slaughtered in the United States.
Last year, President Biden issued an executive order directing the federal government to “maximize the use of goods, products, and materials produced in, and services offered in, the United States,” and advising that “[t]he United States Government should, whenever possible, procure goods, products, materials, and services from sources that will help American businesses compete in strategic industries and help America’s workers thrive.” As a result, “Made in the USA” claims may now be more important to marketers than ever. But given the new FTC rule, its potential effects on consumer class actions, and recent developments in legislation and USDA regulation, the consequences of making an unsupported and unqualified “Made in the USA” claim may also be greater than ever.
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Last month, the FTC announced that it reached a $62 million proposed settlement with Opendoor Labs, related to the Commission’s investigation of the company’s representations in advertising to prospective home sellers. Opendoor is an online real estate business in the “iBuying” (or “instant buying”) space. iBuying companies use algorithms to determine a home’s value and make instant offers to consumers, allowing them to purchase homes directly from consumer sellers as an alternative to traditional sales through a broker. iBuying companies often tout their offering as a simpler, more convenient alternative to a traditional home sales.
According to the FTC’s complaint, Opendoor misrepresented to prospective home sellers that they would make more money from selling their homes to Opendoor than by selling on the open market. In actuality, the FTC maintains that most home sellers who used Opendoor’s services made thousands of dollars less than they would have had they sold it via traditional channels.
The FTC alleged Opendoor advertised it would save consumers money by providing “market-value” offers and reducing transaction costs. For example, the FTC’s complaint cited charts in Opendoor’s marketing materials that purported to compare consumers’ net proceeds from selling to Opendoor versus on the open market. The agency alleged these representations were deceptive because Opendoor’s offers were, on average, consistently significantly below market. Additionally, according to the FTC, Opendoor’s costs were higher than those of traditional sales because it requires consumers to pay for repairs they would not have had to make otherwise. Opendoor further misled consumers, according to the FTC, by overstating the costs of traditional sales.
iBuying is currently estimated to account for about 1 percent of all home sales in the U.S., though in certain metro areas, it may be as high as 6 percent. While iBuying still makes up just a small segment of the market, it may increasingly represent the future of real estate – in which case, the FTC’s settlement with Opendoor will be instructive to companies looking to enter this space. This decision is also a reminder that companies making cost comparisons should make sure those comparisons are accurate at the time they are first made, remain accurate throughout their use, and do not fail to disclose material differences with competing options.
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