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.
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?
Disclosures, Decency and Data Security
For the record, privacy, data protection, information security and international law have officially converged with management, compliance and marketing. More than 30 U.S. states have now passed legislation in one form or another that requires businesses to notify consumers if an actual or potential breach of data security may lead to the compromise of personally identifiable information. This comes on the heels of several years of the government tightening its own policies regarding data security breaches and instances of compromised security.
Recently, the Office of Management & Budget, which oversees U.S. federal agencies, announced a tougher policy for government, requiring agencies to follow the security procedures checklist prepared by the National Institute of Standards and Technology (“NIST”) to protect data. An internal OMB memo recommends that data on mobile computers and devices carrying agency data be encrypted, and suggests two-factor authentication (one being separated from the actual computer obtaining access to the data).
As noted in prior issues of Legal Bytes, requirements and compliance obligations for commercial enterprises doing business across state lines and national boundaries vary, although many have common themes. If you are concerned—and you should be—contact us. We can help you sort out your current compliance obligations and help you keep track of the changing privacy and data protection landscape, both domestically and internationally. Even if you choose not to inject your views into the regulatory process, you must keep abreast of developments or risk action by consumers and regulators.
Look, Up on Your PC: It’s a Bird; It’s a Plane — No, It’s Buzz Marketing
In November 2005, Legal Bytes told you about how branded entertainment and product placement was one of the forces shaking up the world of advertising and marketing. We add to these forces even more creative innovations that are challenging the advertising and marketing world, as well as the legal and regulatory experts. “Buzz” or “viral” marketing is word-of-mouth advertising that promotes a product without disclosing any direct connection between the advertiser and the message. If you are a marketing professional, of course you want to identify people who will be interested in a particular message, and deliver the message in a way that makes it enjoyable and encourages them to share it with more people—you remember the hair color commercial on TV that ends with something like “she tells two friends and they tell two more friends and so on and so on….”
Now clearly, if an individual makes deceptive or misleading statements that weren’t induced, authorized or controlled by the advertiser, it’s hard to hold that advertiser responsible. But now advertisers are paying buzz “agents” to relay messages and encourage further word-of-mouth advertising. Thus, if the advertiser pays, it is hard to argue the advertiser is not liable for the truthfulness of authorized statements. But what happens if the buzzer’s unscripted message (i.e., their own message in their own words) is deceptive? Are their words similar to testimonials, regulated by the Federal Trade Commission, or a form of social spam, requiring disclosure like that mandated in the CAN SPAM Act? False testimonials have been the subject of state and federal actions for years. In some cases, actors in commercials looked so real, some Attorneys General required them to superimpose the words “dramatization” as a disclaimer on the TV screen. Years ago, a motion picture studio had billboards and commercials praising their movies. Unfortunately, the quotes and the purported journalist were invented by marketing staff at the studio.
These cases clearly establish that an advertiser is responsible for deceptive or misleading net impressions created by its advertising. Similarly, the FTC’s Guides Concerning Use of Endorsements and Testimonials in Advertising provides that, “When there exists a connection between the endorser and the seller of the advertised product which might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience) such connection must be fully disclosed.” There is no reason to believe these same standards do not apply to buzz marketing.
If an otherwise ordinary consumer becomes a buzz agent and is paid or given free products or other consideration in exchange for creating “buzz,” appropriate disclosure is likely to be required. Keep in mind, that to prevail in an action alleging a violation, the FTC must still show the activity was deceptive or misleading under Section 5 of the FTC Act—recall from November’s issue, that to make advertising actionable under Section 5 of the FTC Act depends on whether there is a representation or omission likely to mislead the consumer, viewed from the perspective of a reasonable consumer in the situation involved, and the representation or omission must be “material.” As noted in that issue, “if the consumer knew or was told the truth, is it likely to affect a consumer’s behavior in connection with the product.”
The FTC has proposed rules under the CAN-SPAM Act, in which an advertiser is not subject to the Act’s technical requirements if the “send this to a friend” forwarding or sending feature on the website or in the e-mail is not “procured” by the advertiser. In other words, the advertiser hasn’t paid or provided other consideration or induced anyone to initiate the message on behalf of the advertiser—otherwise, the advertiser must comply with all of the CAN-SPAM Act requirements, including disclosing that the message is an advertisement.
While traditional advertising law principles apply, in fact there has been very little actual regulation of viral or buzz marketing. Don’t feel complacent. We should expect the lack of enforcement activity to change reasonably quickly as more advertisers turn to non-traditional avenues to get their message across. New approaches to buzz or viral marketing and, as mentioned in prior issues, product placement, serve to only increase legislative concerns and pressure from consumer advocacy, protection and other groups. As these marketing techniques become more sophisticated and advertisers become more involved in the creative surrounding the medium and the message, the risks increase. Are consumers deceived by information that appears to reflect independent views, when the relayers are actually being compensated for delivering an advertiser’s message? The law appears quite clear that lack of disclosure could violate state and federal law, depending upon the materiality of the statement to a reasonable consumer and corresponding consumer harm.
Psssssst—pass it on.
Waive Your Right to Jury Trial–California Weighs In
A recent California Supreme Court decision (Grafton Partners v. Pricewaterhouse Coopers) held that the California Constitution prohibits pre-dispute waiver agreements when it comes to jury trials. In other words, jury trial waiver provisions in many commercial and consumer contracts may now be unenforceable in California. The decision indicates that a party may not be able to contractually waive its rights to a jury trial because the California Code of Civil Procedure limited enforceability of jury waiver agreements to only those agreements that were entered into after the filing of a lawsuit, not in advance. This is likely to be appealed. We will keep you posted.
Data Miners Can’t Market to Minors?
Just last month (June was a busy month), Utah and Michigan laws came into force which prohibit sending commercial e-mail to children for products a minor can’t legally own there—but the children must be signed up in the newly created Child Protection registries to be covered by the protection. That means not just gambling or alcohol, but tobacco, prescription drugs and a host of other items which children are not permitted to own in those states. Michigan and Utah will both impose fines for violations , and in Utah, sending a message or a web link could also land you in jail for up to three years. And you thought CAN-SPAM was tough—in both states, the penalties apply even if a parent requested the e-mail. Although likely to be challenged, at this point, if you are using e-mail or web-based links to market in these states, the time to worry about doing a merge-purge against the registries before you e-mail is now.
Outsourcing Statistics
According to Technology Partners International as reported in CIO magazine, Europe has now overtaken the United States in major outsourcing deals (i.e., deals valued in excess of about $50mm). In 2004, out of $76 billion in contract value, Europe garnered 49 percent beating the United States and Asia. One of the most important statistics behind those numbers is the fact that more and more outsourcing companies are becoming major players and the competition is heating up. The article lists the big-six outsourcing companies (you’ll have to call me to find out who they said they are) and notes that in 2003 these companies accounted for about 70 percent of the outsourcing contracts, but in 2004 their share dropped to just over 40 percent—a big drop in one year. What that means is that if 26 providers shared the 100 best deals in 2003, 36 shared them in 2004, and only time will tell if the outsourcing market is saturated or if more providers will jump to the front lines in 2005. One trend we are seeing is the segmentation of outsourcing arrangements by sophisticated end-user customers. Not just seeking competitive bidding among providers as in days past, these customers are actually segmenting their outsourcing requirements by function, business activity and operational needs, and seeking niche-based outsourcing providers who are best in the class in those areas.
It seems that the tempting idea of putting all one outsourcing eggs in one basket in order to make it “easier” to manage the relationship has not proved to be very smart after all. It appears that retaining the expertise necessary to manage outsourcing relationships in-house and being sure you have the right outsourcing provider with the right contractual relationship for each function or activity is the wiser course. Speaking of contractual relationships—Rimon has a team of international lawyers experienced in outsourcing. You might want to call us if your thoughts turn to outsourcing; we can and are happy to help. You might also go get a copy of the new book, Outsourcing Agreements Line by Line, written by me and published by Aspatore Publishing—it’s available online (an unabashed plug for both the book and our ability to assist with your legal needs).
NY Pursues Spy and Adware—Deceptive Practices At Issue
On April 28, 2005, New York’s Attorney General sued Intermix Media—a major Internet marketer based in Los Angeles, claiming “spyware” and “adware” were secretly installed, which, among other things, can redirect browsers to unwanted websites, can add toolbar functions and icons, and distribute ads that pop up on your monitor. The suit alleges violation of New York State General Business Law provisions against false advertising and deceptive business practices, and also alleges trespass under New York common law. Intermix’ software would download, install and then direct advertising to computers based on user activity—often without notice and without an uninstall application—when a user visited a website, played a game or downloaded a screen saver. The Attorney General’s office claims that the lengthy licensing agreement purporting to seek permission, even when used, is misleading or inaccurate.
What’s in a Game? Promotions and Advertising on the ‘Net (Part 1 of 2)
Marketing and promotional experts already know that with rare exceptions (e.g., the government), lotteries are illegal. An illegal lottery is a game or contest in which the outcome is determined by chance, the entry requires some form of consideration, and the winner is awarded a prize. Over the years, these three elements have been the subject of scrutiny, regulatory opinion and judicial decision. Although interpretive rules are not cast in concrete, a prize can be nominal in value; consideration can take the form of visiting a store or filling out a lengthy customer survey; and, if chance plays a material factor in determining the outcome, no amount of skill in any of the other elements of the promotion will save the day.
Marketing and promotional experts use “no purchase necessary” or “free alternate means of entry” as tools to avoid consideration—in general, promotions with a freely available alternate means to enter may be based on chance and may have a prize. Some promotions involve skill—eliminating chance. Shooting a hole in one at golf or solving a mathematical puzzle are examples of skill-based contests. Of course, the skill must be bona fide—guessing the number of beans in a jar is not a real skill, no matter how good one becomes at guessing.
Against this backdrop, advertisers, eager to get their message in front of consumers, are finding life increasingly difficult. Have you noticed increased advertising in movie theatres, outdoor signage or on uniforms of your favorite sports figures? Distribution technology and storage and recording media have given us the ability to fast-forward or avoid viewing messages that previously required you to physically leave the room or change the channel! Hmmm…so people are spending more time on the Internet—browsing, surfing—how about advertising there?
Well things seemed to be looking up for advertisers—cookies, pop-up ads, banners, above and below the fold advertising, mass commercial e-mail. Seemed like technology was coming to the rescue. But, enter their legal and technical counterparts—cookie disablers, pop-up blockers, spy-ware and ad-ware detection programs, SPAM and other filters, coupled with legislation and regulation over intrusive technologies or programs that invade privacy or transmit information without consent. Getting the message across is still getting tougher.
One approach is the increased use of “product placement”—insertion of branded products into actual programming “content.” Branded products become part of the action—someone is drinking a beverage, driving a car, using a computer—all branded. One of the most interesting developments in the world of product placement is taking place in interactive gaming. Interactive games require players to sit, often for hours, staring at a screen, paying close attention to the game. Background, backdrop, even music, contribute to making games realistic and become music to the ears of advertisers targeting a captive audience.
Can interactive, Internet-based games require a participant to pay to enter and participate—online “pay-to-play” games—and provide the winner cash or prizes? Here’s how such a game is typically structured: the participant downloads licensed programming for installation on his or her computer—the platform from which instructions and controls are transmitted. When combined with instructions and controls from team members or opposing players, the programming allows the game to be played. To enhance the gaming experience (and also to bolster the argument these are predominantly skill-based, not based on chance) many gaming platforms have sophisticated mechanisms to rate players and provide “matches” of comparable skill. Assuming games are skill-based, many (but not all) jurisdictions permit the payment of cash to play and the award of a prize. In some jurisdictions (but not all), the prize can even be derived from the number of players and the amounts paid by the participants. Check with Rimon before making any assumptions.
Regulation of Internet contests in the United States falls into four broad legal categories: (a) regulation of sweepstakes, contests and prizes; (b) regulation of unfair and deceptive trade practices; (c) regulation of gambling; and (d) consumer protection. We will turn to a more comprehensive legal review in next month’s issue, but we will tell you that if your game attracts children, you had better ensure there are mechanisms enabling you to comply with special regulations that apply. These are not limited to issues involving the age of majority and the ability of participants to legally enter into binding contracts (e.g., Alabama and Nebraska = 19; Mississippi and Puerto Rico = 21). Compliance with the Children’s Online Privacy Protection Act (“COPPA,” not to be confused with COPA or Copacabana—anyone still reading?), considerations of parental consent, propriety of content and a host of other regulations and legal considerations, come to mind.
Stay tuned for next month’s issue to find out more about these legal issues.
Those Bright Ideas Will Cost You!
A little more than a year ago, Taco Bell was ordered to pay $30.1 million to two men who convinced a court they conceived the talking Chihuahua. Lest you think this is an aberration or that these men were opportunists trying to make a quick buck, you would be wrong on both counts. Outside suggestions are a source of potential ideas and potential liability. Companies would be well-served to learn a lesson from these cases.
Smart marketing companies have policies—even outside suggestion “units”—to handle those suggestions company strategists, executives and marketing professionals all say they welcome to better understand what customers want. This is not the place to belabor legal distinctions between market research, focus groups, customer satisfaction surveys and unsolicited outside suggestions, but these distinctions highlight the need to pay attention to potentially dangerous legal landmines at the intersection of intellectual property law and product development.
Imagine that a customer of a bank suggests to the branch manager that the bank issue travelers checks with dual signatures (they exist, so don’t you get any bright ideas) so vacationing couples can use them interchangeably. Now fast forward six months—the bank proudly launches its latest new product, the dual-signature travelers check. Guess the rest. Lawyers, letters, demands, assertions of ownership, misappropriated proprietary information—the suggestion was not an “idea” but a specific product development concept with specific implementation details. Talking Chihuahuas anyone?
Of course, if the company can prove its product was independently developed or in development before the suggestion came in, or that the branch manager threw the suggestion in the trash without telling anyone, showing it to anyone or keeping a copy—yes, the company may win the lawsuit. But do you really want to risk all those lawsuits and the cost of litigation to prove you are right? Settle or fight: each can be costly.
Dealing with outside suggestions should be a part of a company’s product development, brand management and marketing risk management strategy—optimizing the company’s ability to gather meaningful information while minimizing potential exposure to litigation liability and damages. Rimon has lawyers who have developed and managed these functions, counseled clients, conducted seminars, and drafted policies and procedures to do just that. Contact me at joseph.rosenbaum@rimonlaw.com. We are happy to help.