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www.winston.com

October 30, 2009

This issue contains news on the following topics:

I. PROMOTIONS

II. ADVERTISING

III. PRIVACY

I. PROMOTIONS

1. Puerto Rico Revises Sweepstakes Regulations

   On October 27, 2009, Puerto Rico’s Department of Consumer Affairs released new regulations governing the promotion of sweepstakes in Puerto Rico. While many brand owners and promotional agencies routinely ran promotions in Puerto Rico prior to the change, the new regulations clear up a number of ambiguities in the old regulations, place fewer restrictions and obligations on promoters, and generally bring promotion of sweepstakes in Puerto Rico more in line with the 50 states. The regulations apply to “any person who advertises, makes, promotes, holds, organizes or otherwise entrusts the holding of sweepstakes to promote companies, institutions, products, goods, services or any other purpose of commercial gain.” The regulations do not apply to intellectual or sports competitions or other games where skill, talent, or some special attribute is predominant, nor to games run by non-profit entities or political parties. Significant changes from the old regulations include the following:

   • Elimination of Spanish language requirement – rules can be English-only if advertisement of the game is English-only;
   • Certification of drawing and presence of Notary Public at drawing no longer required;
   • Clarifies that abbreviated rules are allowed in advertising and defines what constitutes “abbreviated rules”;
   • Makes the required “publication” of winners easier; and
   • Definition of “consideration” limited to “a monetary payment that financially benefits the promoter” – SASE, visiting a commercial establishment, payment of standard text messaging, or Internet access charges not financially benefiting the promoter are specifically excluded.

   TIP: Under the new less restrictive regulations, companies planning to run sweepstakes in the 50 states and D.C. can now likely extend the sweepstakes to Puerto Rico without significant additional obligations.

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2. COPPA Settlement for Improper Age Screening Results in $250,000 Civil Penalty

   Iconix Brand Group, Inc. owner of the Mudd, Candie’s, Bongo and Ocean Pacific brands (brands with wide appeal to children), settled with the Federal Trade Commission (FTC) on October 20, 2009 over its information collection practices on many of its brand-specific sites. On those sites, while Iconix asked users for their date of birth, those that provided an age under 13 during the registration process were nevertheless allowed to register for the site. During the registration process, users were asked to provide a variety of personally identifiable information (including, name, email address, and in some instances, mailing address), as well as other demographic information like gender, favorite songs, books, etc. Although the Iconix privacy policy indicated that it did not collect personally identifiable information from children under 13, at least 1,000 children under 13 since 2006 had provided personally identifiable information, according to the FTC complaint. Iconix sent marketing email messages to those children, and on one site, allowed them to publicly post photographs of themselves (which postings indicated the child’s name, age, and state). The FTC alleged that these activities constituted both a violation of Children’s Online Privacy Protection Act (COPPA), which prohibits collecting personal information online from children under 13 without parental consent, as well as Section V of the FTC Act, inasmuch as the privacy representations about obtaining parental consent were inaccurate. The settlement terms mirrored those of prior FTC COPPA cases, including payment of a civil penalty ($250,000) and deletion of children’s personally identifiable information. Iconix also agreed to distribute to all of its employees a copy of an FTC guide describing how to comply with COPPA.

   TIP: If you have a web site that is directed to children – or you knowingly collect information from children under 13 by asking users age – ensure that you have a mechanism to screen out children under 13 from providing you with personally identifiable information. This is the second case that the FTC has brought in less than 12 months on this issue, and companies who do collect age online should consider checking their intake forms to ensure that they comply with COPPA, and with the representations made in their privacy policies.

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3. Class Action Filed for Invalid Instant Win Codes in Sweepstakes

   A class action lawsuit was filed against a major alcoholic beverage manufacturer alleging that some instant win game codes distributed in connection with the “Silver Ticket Sweepstakes” (the “Promotion”) were invalid. Plaintiffs alleged that the sponsor issued approximately five million invalid codes in connection with its Promotion. Specifically, the complaint alleges that when consumers entered the codes into the Promotion Web site, it stated that “[t]his is not a valid code” and, thereby, prevented plaintiffs from participating in the Promotion altogether. The complaint further alleges that the sponsor received complaints from consumers during the promotional period but continued to disseminate invalid Promotion codes without disclosing that some products may contain invalid instant win codes. As such, plaintiffs claim that they were unable to participate in the Promotion and had no chance of winning any of the advertised prizes. The lawsuit alleges the sponsor violated various state consumer protection laws by failing to disclose to consumers that some codes were invalid and by misrepresented that consumers could participate in the Promotion by purchasing a product and obtaining an instant win code. The complaint was filed in federal court on October 6, 2009.

   TIP: When conducting a promotion, companies should ensure that all methods of entry are valid and will allow consumers to effectively participate in the promotion.  If the promotion does not run in the manner in which it was planned, companies should promptly modify or suspend the promotion until further action can be taken and promptly notify consumers.

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4. Florida Attorney General Sues For Failing to Send Rebate Checks On Time

   The Florida Attorney General sued Tigerdirect, Inc. for deceptive trade practices with respect to Tigerdirect’s advertisements for its mail-in rebates. Specifically, Tigerdirect advertised that a consumer should expect their rebate within eight to ten weeks. Many consumers received rebates between one to eight months, and some consumers did not receive rebates at all, according to the complaint. Further, the Florida Attorney General found that Tigerdirect had poor methods for processing rebates. Last, the Florida Attorney General found that Tigerdirect withheld sending rebate checks to consumers if the particular manufacturer’s payments were not made in a timely manner to Tigerdirect even though consumers were not instructed that their rebate payment processing time could be contingent upon the manufacturer's payment to Tigerdirect.

   TIP: Rebates must be paid within the time stated in the offer or as required by state law. Regulators are likely to question delays in rebate processing that are based upon a delay in payment from an advertiser to its fulfillment company. 

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II. ADVERTISING

1. Refunds Issued for Baby Einstein Purchases

   According to recent press reports, Walt Disney Studios Home Entertainment is offering consumers who purchased Baby Einstein videos between June 2004 and September 2009 a refund of $15.99, or else the option to exchange the video for another product.  The offer comes after a study done by researchers at Washington University, who reported that babies who watch the videos learn fewer words than children who do not watch the videos.  The Campaign for a Commercial-Free Childhood filed a complaint with the FTC in 2006, and also threatened that it would bring a class action lawsuit for false advertising, based on claims the company had made (but has since stopped) making that the videos were educational.  While Disney is not admitting that the claims are false, it has decided to resolve the issue by offering the refund.

    

   TIP: If making product efficacy claims, make sure to review the substantiation for those claims carefully.  In addition, take into account any counter-studies that might be used against you by consumer advocacy groups, especially when advertising to “special” markets like children.

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2. FTC Settles With Company Over Biodegradable Claims Since Product Not Normally Composted

   The Federal Trade Commission announced a settlement October 22 with a company that makes clothing and other textiles from processed bamboo. According to the FTC, The M Group, d/b/a/ Bamboosa, falsely claimed that its rayon products were made of bamboo fiber, retained bamboo’s antimicrobial properties and were biodegradable. The Commission acknowledged that any plant or tree could be used as the cellulose source for rayon, and that Bamboosa’s product indeed started with bamboo, but contended that the final product was rayon and retained none of the antimicrobial properties of raw bamboo. (The product apparently now is labeled “viscose derived from bamboo.”)
   
   Perhaps of even more interest was that the FTC continued to hold to its position that Bamboosa’s products were not biodegradable because they will not break down in a reasonably short time after disposal. Most clothing and textiles are disposed of either by recycling or in a landfill, and the FTC takes the position that it is virtually impossible for such waste to biodegrade in a landfill within a reasonably short time. (Earlier this summer the FTC charged Kmart, Tender Corp and Dyna-E International with making false claims that their moist wipes products were biodegradable because those products are customarily disposed of in landfills, incinerators and recycling facilities “where it is impossible for waste to biodegrade within a reasonably short time.”)
   

   TIP: Be very careful claiming “biodegradable” when marketing a product which is not customarily composted.

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3. Use of Celebrity Image in Greeting Card May Violate Publicity Right

   Paris Hilton sued Hallmark Cards after a Hallmark birthday card contained a picture of Paris Hilton’s head super-imposed on a cartoon’s body with a caption that read, “Paris’s First Day as a Waitress” and included Hilton’s catch-phrase “That’s hot.” Hilton sued Hallmark for violation of her right of publicity as well as violations of the Lanham Act. Hilton alleged that Hallmark lifted the entire scene on the card from an episode of her television show, the “Simple Life.”
   
   Hallmark moved to strike the right of publicity claim under California’s anti-SLAPP statute which bars meritless lawsuits filed for the purposes of keeping someone from exercising their First Amendment rights on a matter of public interest. The district court denied Hallmark’s motion and the Court of Appeals for the Ninth Circuit affirmed, finding that the anti-SLAPP statute did not bar the action because Hilton’s right of publicity claim was not meritless. The Ninth Circuit concluded that Hilton had at least some probability of prevailing on the merits in part because Hallmark’s use of Hilton’s image was not transformative as a matter of law and Hallmark’s public interest defense was inapplicable since the birthday card did not publish or report information.
   

   TIP: Use of a person’s name or image on a commercial product presents a high risk of complaint, even if you may have a potential fair use defense.

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4. RE/MAX International Wins Trademark Infringement Suit

   RE/MAX International, Inc. brought a trademark infringement suit against Trend Setter Realty, LLC, (“Trend Setter”) for use of “red-over-white-over-blue horizontal bar design” in connection with real estate services. An example of the RE/MAX trademark is on the left, and Trend Setter’s use on the right:
   

   
   In September 2009, RE/MAX moved for partial summary judgment on its federal and state trademark infringement and unfair competition claims. RE/MAX also sought cancellation of Trend Setter’s registered trademark, because it causes confusion with RE/MAX’s registered trademarks. The court found in favor of RE/MAX, granting RE/MAX’s claim for cancellation of Trend Setter’s trademark registration. Specifically, the court noted that the “use of the red, white, and blue signs in advertising is likely to confuse ordinary consumers,” that both companies advertise similar services using similar advertising means, and survey evidence showed that consumers believed that Trend Setter’s signs promoted RE/MAX. In October 2009, the court enjoined Trend Setter from using, manufacturing, advertising, and distributing the “red-over-white-over-blue” horizontal bar design or confusingly similar designs in connection with real estate services.

   TIP: Be aware that trademark infringement may occur not just with respect to names and logos, but for design features as well.

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5. FTC Enters Into Final Consent Agreement Regarding Product Claims

   The FTC entered a final consent agreement with Constellation Brands concerning the FTC’s charges that ads for Wide Eye caffeinated schnapps were deceptive. Wide Eye was a schnapps product containing 30 percent alcohol by volume.  Ad claims included “Wake Up @WideEye.com,” “I am your wake up call,” and “When you party with the world’s first caffeinated schnapps it’ll seem like the rest of the world is sleepwalking through life.”  According to the FTC, these claims expressly or by implication promised that consumers will remain alert while consuming Wide Eye.  A number of state attorneys general had also called on the FTC to crack down on Wide Eye, arguing that it, like other popular energy drinks, appealed to youth and underage drinkers.  Prior to product launch, Constellation had obtained all required U.S. Alcohol & Tobacco Tax & Trade Bureau (TTB) approvals for Wide Eye and the product’s brand name and tagline were subsequently found to be in accordance with the voluntary DISCUS Code of Responsible Marketing Practices.
   
   The consent agreement, which does not constitute an admission of a violation of law, prohibits Constellation from representing “expressly or by implication, including through the use of a product name or endorsement, that such product…will counteract the effects of alcohol consumption” unless the advertiser has “competent and reliable scientific evidence” supporting that representation.  The FTC order pertains not just to Wide Eye, but also to any other alcohol product containing caffeine, ginseng, taurine, guarana, or any stimulant.  The Order puts any such Constellation products under the FTC’s close eye until the order expires in 2029. 

    

   TIP: All claims for a product, including a name that might imply a claim, must be supported by competent and scientific evidence in the advertiser’s possession at the time the claim is made.

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III. PRIVACY

1. Facebook Settles Privacy Lawsuit for $9.5 Million

   Facebook recently settled a class action lawsuit filed in California against its Beacon program. Under the Beacon program, users who visited one or more of the Facebook Beacon-affiliated websites and engaged in a triggering activity would have their information shared with Facebook regarding their activities on the affiliated websites. The plaintiffs alleged that, inter alia, the Beacon program violated the Electronic Communications Privacy Act, the Video Privacy Protection Act, and the Computer Fraud and Abuse Act. Specifically, the plaintiffs claimed that Facebook violated consumers’ privacy rights by failing to properly provide notice of the Beacon marketing and data sharing activity, and failing to obtain informed consent before acquiring and transmitting personal information from Beacon-affiliated websites to Facebook. As part of the settlement, Facebook will establish and administer a cash settlement fund of $9.5 million. The money will be used to establish and operate a privacy foundation devoted to education programs for users, regulators, and enterprises. The programs will center on critical issues for protecting identity and personal information online. Additionally, Facebook has agreed to terminate the Beacon program.

   TIP: In the wake of this settlement, as well as the developments we reported on regarding the FTC's online behavioral advertising guides and its recent settlement with a major retailer regarding the same, companies that engage in online data sharing for marketing purposes should have plans in place to give notice about their activities, and to obtain permission from consumers.

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Attorney Advertising Materials

These materials have been prepared by Winston & Strawn for informational purposes only. These materials do not constitute legal advice and cannot be relied upon by any taxpayer for the purpose of avoiding penalties imposed under the Internal Revenue Code. Receipt of this information does not create an attorney-client relationship. No reproduction or redistribution without written permission of Winston & Strawn LLP.

Along with this briefing, a library of all the Winston & Strawn LLP briefings published to date can be accessed by visiting the Publications Library section of Winston & Strawn LLP's Web site (www.winston.com).

Copyright © 2009. Winston & Strawn LLP.