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Do Legitimate Advertisers Unintentionally Encourage Adware?

That’s what the Center for Democracy and Technology says in a report issued this past March. Internet surfers are often tricked into downloading programs that barrage them with pop-up ads, potentially pose a privacy risk, and are just plain annoying. Here’s how the Center connects the dots: An advertiser (or its agency) makes a deal with an “adware” company. A user clicks on the ad, the adware company gets paid. The adware company needs a company that furnishes “client-side” software (those “install” packages that add “toolbars” to your browser or “plug-ins” to your applications) so the adware gets inserted into a software bundle when you install the software. Guess what—the software distributor gets paid by the adware company each time that happens, too! If that were all, you would think advertisers could easily control arrangements with adware companies and, correspondingly, software distribution companies working under the direction of those adware companies. But you knew it wasn’t going to end here.

Advertisers and agencies often work through affiliate networks. They get paid to place the ads (think “media buyer” with a technology hat)—banners, pop-ups, sponsored links, pop-unders, search engine ads. The broader the reach, the more they get paid. Some affiliate networks have other affiliate networks they use to further ensure online advertising is all over the place (and revenue increases correspondingly). There are affiliate networks that place blind advertising—their clients don’t know where ads are placed. Website operators, hosting companies and Internet service providers are also enlisted to distribute software through websites and often have developed a network of distributors. Remember, the goal of advertising is to reach as many relevant consumers as possible—limiting how, where, when and to whom adware is available is not exactly consistent with limiting the message or the medium.

Thus, for consumers and regulators it is not simple to figure out how an advertisement arrived at your computer from its origins at the advertiser. The paths may be different for each ad and for each consumer—adding to the complexity of fixing responsibility. Hmmm.

Often, the financial incentive is so great that the operator of a website will push adware onto users’ computers without consent. In many cases, neither the advertiser, nor the adware creator is likely to find out. With such a distributed, diverse and indirect chain of relationships and payments, no wonder I keep getting those pesky pop-ups! A user might not have a clue why a particular ad is showing up and, significantly, even if a consumer responds to the ad, the advertiser may have no way of knowing if the adware was placed without consent—in violation of the advertiser’s policies and best intentions.

Does your company unwittingly contribute to the problem (or ignore it)? Do you have policies (which translate into legal obligations)? Do you require monitoring, audit reports and enforcement? Why not? I like advertising, but not the kind that stems from software installed on my computer without my permission. If financial incentives stimulate (or tacitly condone) proliferation of poor practices, changing the financial incentives, especially if impermissible activities are detected, can change the practices. Would you prefer to have your company and its brand names highlighted in reports by or to the FTC? That’s where you don’t want your name to pop up!

Need to understand more? Need help? That’s why we have an Advertising, Technology & Media law group—we understand your ads, the technology and the media. Contact me if you do.

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Global Forum Shopping in Defamation Cases Gets More Difficult

In a decision of potentially great import, the UK’s top court sided with a European newspaper (The Wall Street Journal Europe) in a defamation case. Until now, British libel laws had been among the most plaintiff-friendly of any jurisdiction in the world, in part based on a 2001 libel decision known as Reynolds vs. Times Newspapers Ltd. that was intended to protect serious investigative journalism on matters of public concern.

It is expected the ruling will now allow the media in the United Kingdom to better defend against libel actions by asserting reports were in the public interest, involving responsible journalism, protections similar to those of the U.S. media under the First Amendment of the Constitution of the United States. The High Court articulated the new standard for such decisions as being “whether the defendant behaved fairly and responsibly in gathering and publishing the information.” If journalists and editors behave responsibly and the news story is of public importance and relevance, the fact that there are defamatory allegations against prominent people in the report, does not, in and of itself, permit damages for libel.

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Internet Gambling – Hit Me!

On Oct. 13, 2006, President Bush signed The Internet Gambling Prohibition and Enforcement Act into law. The Act was actually tacked onto a piece of legislation intended to tighten security for the United States’ sea ports. The Internet Gambling legislation, originally a standalone bill, was attached as an amendment to the security legislation at the last minute. Although titled “The Internet Gambling Prohibition and Enforcement Act,” it is actually not an outright ban on online gambling. It is, however, a federal ban on banking institutions knowingly transferring funds to businesses or individuals that operate, conduct or are engaged in activities that are considered illegal under U.S. law. Thus, transactions involving the movement or transference of funds to businesses that are conducting gambling operations in states and areas where gambling is prohibited is now illegal.

The law requires financial institutions to develop and implement some type of transaction security system within the next nine months, so that fund transfers to institutions on a blacklist will automatically and electronically be blocked; presumably on the list will be those online gambling operators identified by the Department of Justice. That said, the Act is not specifically limited to gaming companies—although it appears that those are its initial focus and intended target. In the wake of passage of the Act, online gambling operators—many from the U.K., Malta and jurisdictions outside the United States—have already announced their withdrawal from the U.S. marketplace. Stay tuned as enforcement efforts start to make news.

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Brands & Entertainment

Those name brands appearing in hit shows. Those logos on the motion picture screen. The characters at the breakfast table with a favorite cereal. The star driving around in a particular automobile. The airline shown flying the lead character off to an exotic destination. Reality? Coincidence? Hardly. They are the result of contracts between the entertainment company or producers and the advertisers, and they represent a growing and important trend in marketing to consumers, along with the Internet, as reaching market segments through traditional radio and television advertising becomes increasingly difficult in our on-demand, fast-forward world.

In some cases, such “branded” entertainment is subtle—inserting itself into a scene or a sequence quite seamlessly and, not necessarily inconsistent with, reality. In other cases—“Harold and Khumar Go to White Castle”—yes, this really was the name of a movie, as was “Akeelah and the Bee,” which Starbucks helped finance and promote. In case you didn’t know, the FCC (and the FTC) regulate advertising on television—the FCC’s regulations concerning disclosure arose primarily from the quiz show scandals in the 1950s. When does creative control over programming yield to paid sponsorship and financing dollars or Euros (or British Pound Sterling). At what point does a program or movie become an infomercial or advercast? Are there vulnerable groups (e.g., children) that might not distinguish so readily between advertising and programming and at what point is that deceptive? What does SAG say about their actors being de facto appearing to endorse a product or brand inserted into their scenes and programs? If an actress is under contract with a cosmetic brand exclusively and a movie scene requires her to use a different brand—actionable? When the trailer with that clip airs on broadcast television—problem? Witness the following quote from Jonathan Adelstein, FCC Commissioner: “Now, products have even seeped into plot lines. Soap operas have woven cosmetic lines into their tales of who-did-what-with-who, while “The Apprentice” sounds more and more like an hour-long infomercial for the latest corporate sponsors.”

Trademark issues, endorsement and competitive/ambush marketing issues, free speech, freedom of expression, adequacy of disclosures, misleading or deceptive advertising—the list of potential issues is growing as the balance between creative control and commercial reality infect the entertainment industry. At one extreme is the traditional product placement in which an advertiser pays a fee for the hopes that the scene with its product doesn’t get cut and wind up on the editing room floor. At the other extreme is a placement fee and promotional campaign that is so integrally tied with the plot and the program that the two are indistinguishable—think “The Apprentice” or “Home Makeover.”

The deals are becoming more complex, and more fraught with potential legal and regulatory issues, and the stakes are higher. Need help? Contact Doug Wood or me—we would be happy to help.

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Virtual Worlds–Not Really Virtual, Not Virtually Real

I was having an interesting discussion with a lawyer friend whose views about promotions and marketing I respect greatly. We started out talking about virtual worlds and avatars and the new proliferation of non-reality based entertainment—virtual Laguna Beach, for example. Now, I seem to have enough trouble juggling the demands of life in the real word. I have had my fill of reality shows—which never seem to be quite real—and I was just beginning to get the hang of fantasy sports leagues and interactive game playing. Now along come virtual worlds, where fantasy, role-playing, game-playing and interactive social networking collide. I remember playing Kings Quest and Police Quest and Space Quest and chuckling, with my kids, about the funny lines and the clever clues as we searched kingdoms, busy streets and outer galaxies to solve the puzzle. My daughter just recently reminded me of Ecoquest—a game I can’t find anymore that taught us all a little bit about saving the environment. Then came MMOGs and MMPORGs (that’s “Massively Multiple Player Online Role-Playing Games”—for the uninitiated). In virtual worlds, I get to act out a combination of real and fantasy activities with virtual characters called “avatars” which are created within parameters defined by the computer code, but which are otherwise open to my unique interpretation of the characters and roles I choose to play. I read a report about a man in South Korea who died of heart failure last year. Apparently stopping only for bathroom breaks and short catnaps, he played an online simulated war game for 50 hours and, ostensibly because of exhaustion, his heart gave out. I recently read several reports that made me realize this was no longer just child’s play. The first was about a woman who was able to quit her job because, through buying, selling and creating properties and providing services in a virtual world, she was able to “earn” more than $150,000 per year. Although I don’t know exactly what she did, I know you can convert your digital earnings into real money at websites such as gamingopenmarket.com. These sites not only enable you to convert digital-virtual money into U.S. cash at exchange rates that are established much the same way monetary exchanges do around the world, but they also enable folks like you and me to dabble in arbitrage trading in virtual currency. Will I someday be able to take my virtual company public in an IPO or solicit venture capital investments from qualified avatars? Is the SEC far behind?

Continue reading “Virtual Worlds–Not Really Virtual, Not Virtually Real”

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The FTC Gets Into the Patent Act

The FTC recently held that Rambus, a developer of computer memory technology, violated Section 5 of the FTC Act, engaging in monopolistic practices—abusing the process for setting industry standards for memory chips (DRAM). Rambus participated in the standard setting, but didn’t reveal it applied for and obtained patents that included technology incorporated into the very standards Rambus helped to craft. The FTC held that as a result of Rambus’ deceptive conduct, it engaged in anticompetitive conduct. The FTC found Rambus had intentionally and willfully engaged in deceptive conduct and misled others in the standards-setting organization—clearly to its detriment.

The Commission determined that Rambus’ conduct enabled it to acquire patent monopoly power in a number of relevant and related markets, while its deceptive behavior within the standards-setting organization led to the adoption of standards by the industry group that unwittingly incorporated Rambus’ patent rights. At least one FTC Commissioner went even farther and wrote that the abuse and deception within the standards-setting process was not only in violation of antitrust laws, but also constituted an unfair method of competition in violation of the broad scope of the FTC Act.

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Gift Cards in the Legal Limelight

In a decision of potentially far-reaching consequences, on Aug. 1, 2006, a U.S. District Court in New Hampshire ruled the sale of Simon Giftcards—prepaid electronic stored value cards—sold by the company that owns and operates shopping malls, are not subject to certain provisions of the New Hampshire consumer protection laws and are preempted by federal law. Simon cards look like ordinary plastic credit cards and operate on the Visa network. Simon became subject to action by the Attorney General in New Hampshire because each card had an expiration date and fees were imposed that reduced their value, violating provisions in New Hampshire’s Consumer Protection Act.

Simon cards are issued by U.S. Bank (formed under the National Bank Act) and MetaBank (a federal savings association under the Home Owners’ Loan Act). Simon had agreements under which each bank owns and issues the cards, manages the “account” relationship with the consumer, and sets the fees and terms that apply. Simon is responsible for advertising, marketing, promoting and selling the cards. Simon has no right to define or change the terms of the contract between the bank and consumer. Simon sells a Giftcard to a consumer and collects payment. The amount of purchase, minus an initial fee, is loaded onto the card, and Simon gives the consumer a copy of the card agreement along with the card. Simon deposits the funds into the bank’s account and the bank pays Simon a sales commission. When the consumer uses the Giftcard, the bank sends the money to the merchant through the Visa network, and all further deductions or fees charged are bank charges.

New Hampshire sought to stop the sale of these cards—asserting that Simon sells these Giftcards as an agent for the banks; and since Simon is not a bank, New Hampshire laws can be applied against Simon. Because the Giftcard is sold by Simon—a non-bank—the state claimed federal laws don’t preempt any limitations New Hampshire law impose to protect its citizens.

In deciding the case, the court notes that state regulations are preempted whenever they conflict with federal regulations, or when state law impedes the accomplishment of federal law objectives. Clearly, state regulation cannot limit fees charged or impose restrictions on the contract between these banks and the purchaser—thus state regulation is preempted. But what about Simon?

Continue reading “Gift Cards in the Legal Limelight”

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The Truth Shall Set You Free: Deception Gives Rise to Personal Liability

A court has held an individual personally liable to the tune of $17 million for deceptive mail solicitations because of his exercise of control over companies that mailed solicitations, his review of some of these solicitations, and his personal knowledge of customer complaints. If a person is directly involved in the act, has the authority to control them, knew of material misrepresentations or was recklessly indifferent to the truth, or knew there was a high probability of fraud and intentionally avoided the truth, that person can be held personally liable under Section 5 of the FTC Act.

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Should You Hear Me Now?

Clients often ask whether customer service calls can be taped or recorded for training, monitoring, security or other purposes. They want to know if they need to get express consent from the customer or even their employees when setting up the recording process. Many states have specific laws that deal with both monitoring and recording of telephone or other electronic communications—not to mention federal wiretap laws. Well recently, the California Supreme Court ruled that a business located in the state of Georgia that recorded a call with a California resident violated California’s two-party consent rule, even if you are in Georgia (which only requires one of the parties to consent— i.e., yours). In addition to California, a number of states have two-party consent laws (for example, Pennsylvania, Florida, Connecticut and Washington, to name a few), and if you are or are thinking of monitoring or recording any calls, check with a lawyer to be sure you know what you must do to comply—on second thought, don’t just check with a lawyer, call Rimon. Our Advertising, Technology & Media Law practice has what it takes—record that please!

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Truth in Video Gaming?

A proposed new “Truth in Video Game Rating Act” (H.R. 5912), would require the Federal Trade Commission to promulgate rules prohibiting unfair and deceptive acts or practices by video game marketers, and would require ratings to be based on video or computer game content as a whole. It would also be a violation if any producer or maker of these games hid or grossly mischaracterized the content of the game. Joysticks ready?