Many in the industry are familiar with the following scenario. A young gamer, grinding tirelessly for untold hours perfecting her skill, honing her strategy, finally qualifies for an eSports tournament. For that gamer, the true hard work begins after qualification. She now has to try to convince her parents to agree to let her participate, which may include travel (though compensated) to a far off location. In many cases, the first time the parents become aware that their child even entered a tournament (much less won an all-expense paid trip to an eSports tournament) is this conversation—after the child has already been offered compensation to travel to and compete in the tournament. If you are a game publisher, tournament organizer, or otherwise involved in the logistical chain of events described herein, there may be a big problem. The collection and use of data provided by children is regulated in the United States by the Children’s Online Privacy Protection Act (“COPPA”). COPPA is designed to protect the privacy of children by establishing certain requirements for websites that market to children. Most notably, COPPA requires website operators to obtain “verifiable parental consent” before collecting personal information from children. The FTC operates under the assumption that if children are the target demographic for a website, the website must assume that the person accessing the website is a child, and proper consent must be obtained. This assumption exists even if the website did not start with children as the target audience. Failure to adhere to COPPA’s requirements can result in heavy penalties and negative publicity. The FTC brought actions against Musical.ly for its TikTok platform and Google for its YouTube platform, settled for $5.7 million and $170 million respectively. Next week, the FTC will host a workshop on COPPA to address how consent should be obtained in many situations, such as our gaming tournament scenario. The workshop will discuss compliance as it relates to image data, voice data, and education technology. This workshop will be especially important for the gaming and eSports industry because many entities within this industry market directly to children. Indeed, because games, tournaments, and general content are (in large part) targeted to those that are protected by COPPA, compliance issues abound in the industry. The workshop will be on October 7, 2019, in Washington, D.C. The Venable team plans to attend the workshop. If you have any concerns that you would like voiced during the workshop, please feel free to contact me. Stay tuned to Venable’s All About Advertising Law Blog and Close-Ups Entertainment and Media Blog for our thoughts on the workshop next week.
via Tumblr Update Required for Youth Esports
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Being able to advertise your product as “Made in the USA” can be a key advantage to marketers and is an attribute that is important to many consumers. Aware of this, the FTC has been on the watch for deceptive Made in the USA claims. Last week, the FTC held a workshop on “Made in the USA” claims to consider consumer perception of these claims and the need for any changes to the existing guidance provided by the FTC. Current FTC guidance on these claims stems from a 1997 FTC Enforcement Policy Statement in which the FTC concluded consumers are likely to understand an unqualified U.S. origin claim to mean that the advertised product is made in the USA with “all or virtually all” of the components made in the United States. The workshop began with a discussion on current consumer perceptions of what a “Made in the USA” label means, and why consumers buy “Made in the USA” labeled products. Panelists discussed research showing that consumers purchased “Made in the USA” labeled products: (1) to help keep jobs in America; (2) to support the U.S. economy; (3) because of a perception that products made in the USA are more reliable than products manufactured abroad; (4) because of a perception that working conditions for manufactures in the U.S. are better than those abroad; and (5) because consumers believe it is patriotic to buy American. The panel also discussed survey evidence indicating that American consumers are increasingly concerned with transparency, responsible sourcing, and an ethical supply chain when they are considering what products to buy; with these factors being particularly important to millennial consumers. Panelists then discussed the difficulties with doing business under the current policy. A recurring theme was the ambiguity surrounding the “all or virtually all” standard for unqualified “Made in the USA” claims and the difficulties many manufactures face in trying to meet this standard. The FTC requires significant parts and processes that are not made in the USA to be “negligible,” but provides no numerical standards for “all or virtually all”. Also confusing matters is the California law that prohibits Made in USA claims “when the merchandise or any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States.” The California law makes allowances for products based on the percentage of non-U.S. made parts or services in the wholesale value of the end product. The panelists remarked how these ambiguities have forced some manufactures to either make a qualified claim or, because of the extensive cost and time involved in figuring out if their claim is compliant with the FTC standards, decline to make the claim altogether. To conclude the workshop, FTC staff explored potential remedies or changes to the FTC’s existing guidance with the panelists. Some panelists argued for tougher penalties for violators (including monetary damages and a mandatory notice of violation) as a more effective deterrent to bad actors, along with better follow up by the FTC on previous violators who had received closing letters. The FTC staff remarked that it would be difficult for them to expand their enforcement efforts via litigation because of staff and budgetary restraints. Nearly all of the members of the panel agreed that the policy statement and the “all or virtually all” standard should be codified in a rule that would help clear up some of the ambiguities currently surrounding the “Made in the USA” claim process. The FTC encouraged panelists and the public to comment on potential changes to the policy via their website. What, if anything, the FTC does next remains to be seen.
via Tumblr FTC Workshop on “Made in USA” Claims In Mary et al. QEP Energy Company the question was, given an encroachment of a pipeline onto the property of another, what is the test for determining the good faith, or not, of the party in possession? Ms. Mary and QED were parties to a Pipeline Servitude Agreement and what appears to be an oil and gas lease (the court could have just called it that). Ms. Mary et al claimed that QED’s gas pipelines unlawfully extended onto their property by 31 feet and 15 feet and sought disgorgement of the profits derived from the pipelines. The issue was to determine the source of the liability of QED, the encroacher, which would determine damages. Louisiana Civil Code Art. 486 allows a possessor of property in good faith to maintain the ownership of fruits he has gathered, and a possessor in bad faith is bound to restore to the owner the fruits he has gathered or their value, subject to a claim for reimbursement of expenses. There are different ways under the law to approach the question. The parties each had their favorite statutory solution. CC Art. 670, cited by the plaintiffs, addresses a landowner who constructs a building in good faith that encroaches on adjacent estate. The district court went with Art. 670. But the Fifth Circuit observed that Art.670 addresses a “building” built by a “landowner” and determined that a servitude holder is not a landowner and a pipeline is not a building in the ordinary sense of the word. The Fifth Circuit went with Art. 487, championed by QEP, which addresses the doctrine of accession. “For purposes of accession a possessor is in good faith when he possesses by virtue of an act translative of ownership and does not know of any defects it is ownership. He ceases to be in good faith when these defects are made known to him or an action is instituted against him by the owner for the recovery of the thing. So what is accession? Harking back to simpler times, the Louisiana Civil Code designates material or intangible objects that are susceptible of appropriation as “things”. Land is a “thing”, for example. The ownership of the “thing” confers upon the owners “the ownership of everything that [the thing] produces or is united with it … ”. Secondary things are known as accessories. Accession is a right of ownership over a thing by virtue of it being an accessory. What’s the point? An owner is entitled to profits from a thing because profits of the type of accession known as fruits. The parties were fighting over the fruits (profits) of a thing (land) on which the pipelines are located. Those profits accrue to the owner of the land because they are accessories of the land itself. In other words, said the court, they accrue by accession. The Fifth Circuit concluded that the profits belong to the possessor in good faith and sent the case back to the district court to figure out whether QEP met the test for good faith Before you go deriding Louisiana law for calling things “things” (which is what they are, after all) know that it has its own big words that you don’t understand: the reconventional demand, the usufructuary and sibling the naked owner, incorporeal movables, toleration of the enjoyment, … I could go on. What does the King of Zydeco think about these odd-sounding words? What is the Test For Good Faith in the Louisiana Civil Code? syndicated from https://888migrationservicesau.wordpress.com via Tumblr What is the Test For Good Faith in the Louisiana Civil Code? In the following guest post, Richard M. Leisner, a Senior Member in the Trenam law firm in Tampa, takes a look at an unusual and interesting recent decision from the Delaware Chancery Court, Stacey Kotler v. Shipman Associates, LLC (here). Regardless of where you sit, this decision is worth consideration, as the parties had a fully executed stock purchase agreement yet as a result of the court’s decision the intended beneficiary came up empty. As Richie points out, there are some important lessons from this decision. I would like to thank Richie for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to publish a guest post. Here is Richie’s article. ************************* In a recent Delaware Chancery decision, Stacey Kotler v. Shipman Associates, LLC, 2019 WL 3945950 (Del. Ch. Aug. 21, 2019), Vice Chancellor Joseph R. Slights, III found that a fully executed stock purchase warrant agreement was unenforceable. This somewhat unexpected decision and the details in its underlying facts harbor important lessons for transactions attorneys in today’s fast paced corporate practice. In 1999, Marissa Shipman began mixing cosmetics in her kitchen sink, launching a business that became known as “theBalm.”[1] In 2003, Ms. Shipman hired her friend Stacey Kotler as an independent contractor salesperson. Ms. Shipman and Ms. Kotler proved to be a good team and theBalm flourished. Working on a “handshake” agreement for commissions, Ms. Kotler eventually was designated as the company’s Vice President of Sales and Business Development. By 2017, when the litigation was filed, Ms. Shipman was CEO of a privately owned family business tagged with a value of between $600 and $700 million. The litigation concerned the validity of a stock purchase warrant agreement allegedly granted to Ms. Kotler in 2007 giving her the right to acquire up to 5% of the company’s equity.[2] Using the low end of the 2017 valuation, Ms. Kotler’s warrant would have covered equity with a value of approximately $30 million.[3] The first steps down the road to the current litigation began with Ms. Kotler’s repeated requests for equity ownership in theBalm. The parties are in agreement that Robert Shipman, the founder’s father who handled the operational side of the business, repeatedly promised Ms. Kotler she would be rewarded with a measure of equity ownership. Over a period of approximately eight months in 2007, the parties exchanged and negotiated several drafts of a stock purchase warrant agreement. Oliver Brahmst, a partner in the New York City office of White & Case, was the company’s principal lawyer. In something of a departure from customary practice, it appears Mr. Brahmst did not communicate regularly with Ms. Kotler’s attorney or copy Ms. Kotler with draft agreements as they were prepared. Instead, Mr. Brahmst sent drafts to the company which in turn forwarded documents to Ms. Kotler. Ms. Kotler then sent her comments and suggested changes to the draft warrant agreements back to Robert Shipman at the company. Ms. Kotler did not send copies to Mr. Brahmst. Apparently, Mr. Shipman negotiated directly with Ms. Kotler and Ms. Shipman did not participate actively in the negotiations. The opinion does not report the extent to which Mr. Brahmst or Ms. Kotler’s counsel were involved in the parties’ negotiations or whether there were any counsel-to-counsel negotiations. In the litigation, the discovery process failed to develop many of the key the facts regarding the history of the warrant agreement negotiations. Ms. Kotler was unable to recall key elements of the underlying facts at several junctures. These lapses in Ms. Kotler’s memory extended to the name of her lawyer. Ms. Kotler’s memory issues were exacerbated by similar memory lapses by each of Marissa and Robert Shipman and a paucity of documentary evidence. Neither side retained emails or other correspondence. Indeed, the court described theBalm’s informal corporate recordkeeping practices as “at best, careless.” In addition, many corporate records “disappeared” sometime after the 2007 warrant agreement negotiations, making them completely unavailable in the litigation. The court lamented that, other than the various draft warrant agreements, the record held very little in the way of helpful contemporaneously created records. Early in the 2007 negotiations, the parties agreed the warrant would cover approximately 5% of the company’s stock.[4] However, the parties did not agree on company requested restrictive covenants. As proposed,[5] the covenants prohibited Ms. Kotler from engaging in certain broadly defined competitive activities (for convenience, “no compete” and “no solicit” provisions). The no compete and no solicit provisions would never expire. Violation of the no compete or no solicit provisions would automatically trigger total forfeiture of the warrant’s stock purchase rights. Ms. Kotler initially objected to any restrictive covenants after her relationship with the company ended. Eventually, it appears Ms. Kotler may have been agreeable to a no compete and no solicit while she was an independent contractor and a no solicit that would survive for 18 months after she and the company ended their relationship. Neither side could recall having changed from their initial positions regarding the no compete covenant. The court recounts in excruciating detail the multiple drafts and varying negotiating positions and arguments, including drafts of February 25, June 8, August 6, September 5, September 12, September 17 and September 25. Chancellor Slights’ factual summary occupies most of the opinion. The opinion is augmented by 206 footnotes, many of which are rich with more facts or reference to specific pages of the trial transcript, joint trial exhibits and pretrial stipulation.[6] Nevertheless, the parties’ memory lapses and modest records outside the drafts leave events and issues shrouded in uncertainty. The most important uncertainties surround Marissa Shipman’s execution of the signature page of the fully executed “wet ink” warrant agreement referenced in the opening paragraph of this article (the September 17 draft).[7] Did Ms. Shipman sign an “orphan” blank signature page provided by Ms. Kotler; did Ms. Shipman sign the signature page at the end of or accompanied by the September 17 draft; or did she sign a different draft of a complete agreement? Did Ms. Kotler “switch” the signature page from the earlier September 12 draft with its perpetual no compete and 24 month post termination no solicit or did Ms. Shipman simply sign the September 17 draft without reviewing it? Significantly, Ms. Kotler prepared the September 17 draft making changes from the September 12 draft prepared by Mr. Brahmst. Among the changes Ms. Kotler made in the September 12 draft were a reduction in the number of shares from 533 to 502 shares and including no solicit, no compete and forfeiture provisions that were far less restrictive (less company favorable) than had been demanded by the company up to that point in the negotiations.[8] What happened next is unclear.[9] Chancellor Slights noted: “… of course, none of the witnesses had a clear memory of what happened.” What is known according to the court’s opinion is that:
From later events, it appears that a few days after September 17, Ms. Kotler executed the signature page Marissa Shipman executed (and previously sent to Ms. Kotler). This fully executed signature page became part of what Ms. Kotler later referred to as the “wet ink” fully executed warrant agreement. Stacey Kotler’s relationship with theBalm ended in the spring of 2009, after the company rejected Ms. Kotler’s demands for more compensation, more equity and greater responsibility. In July 2009, shortly before launching a competing venture, Ms. Kotler sent a letter to the company claiming that she held a warrant for 502 shares of common stock and requesting that she be notified of any triggering events.[11] The company did not respond to this letter or contact Mr. Brahmst at White & Case. In 2013, the September 17 draft executed by Ms. Kotler (but not by Ms. Shipman) was found in the company’s records. In 2016, as the company pursued a possible sale, questions arose regarding the validity of Ms. Kotler’s warrant and Ms. Kotler’s counsel provided the company with a copy of the “wet ink” fully executed September 17 draft warrant agreement. The company engaged separate counsel to pursue settlement with Ms. Kotler. Those efforts were not successful. This litigation followed in 2017. Chancellor Slights ruled that Ms. Kotler failed to meet the plaintiff’s burden of proof: to prove the existence of a binding warrant agreement by a preponderance of the evidence. True, there was a fully executed warrant agreement, but there also were the defendant’s credible assertions that the company would never have agreed to the significantly reduced restrictive no compete and no solicit covenants that were found in Ms. Kotler’s fully executed agreement. The Chancellor then turned a bit philosophical about his ruling:
It is certainly fair to leave this case with questions about the “fairness” of the court’s ruling. The company repeatedly promised Ms. Kotler that she would receive equity in the company, but the court left Ms. Kotler empty handed on the courthouse steps. There was a signed warrant agreement with valid signatures. In the absence of fraud or other extenuating circumstances, parties signing written agreements will find courts enforce such agreements according to their terms.[13] The court in this litigation could have chosen to give the company the unenviable task of carrying the burden to prove why the signed agreement shouldn’t be enforced. The court took a different approach, one that brought victory to the defendant. The court gave Ms. Kotler the burden of proof to establish that a meeting of the minds occurred in 2007. Marissa and Robert Shipman argued that they would “never have agreed to the terms” in the executed warrant agreement. It seems that the parties’ collective significant memory lapses, while straining credulity, ultimately worked to the great benefit of the defendant’s side of the argument.[14] In retrospect, regardless of how one feels about the court’s ruling, this case begets several practical lessons for today’s corporate transactions lawyers.
* * * * [1] The company’s website is available at www.thebalm.com (last visited September 10, 2019). [2] Originally incorporated in 1999 as “The Balm.com,” the company soon changed its name to “Shipman Associates, Inc.” The warrant purchase agreement drafts prepared in 2007 covered shares of common stock of Shipman Associates, Inc. In 2014, the company completed a complex holding company reorganization. For convenience, references in this article to “equity” are to the common stock of Shipman Associates before the reorganization. [3] This projected valuation was reported in The Wall Street Journal and was noted in the parties’ pretrial stipulation. [4] Although the number of shares covered by the draft warrant agreement changed several times, the record indicates that the parties in the litigation ultimately agreed to 502 shares or approximately 5% of the company’s undiluted common stock. The first draft covered 1,055 shares, approximately 10% of the company’s stock; subsequent drafts covered 533 shares, 5% of the equity on a fully-diluted basis; late in the negotiations, after in person discussions between Mr. Shipman and Ms. Kotler, there was agreement to a further reduction to 502 shares, 5% of the undiluted stock. [5] The first draft of the warrant agreement in February 2007 omitted any no compete or no solicit provisions. In subsequent drafts, the company included no compete and no solicit provisions with perpetual terms. [6] The footnotes occupy 7.5 pages while the body of the opinion uses only 6.5 pages. [7] There was no suggestion that Ms. Shipman’s signature was forged. It was admitted that she signed the signature page. [8] All the other drafts had been prepared by Mr. Brahmst of White & Case. The September 17 draft apparently was based upon the September 12 draft prepared by Mr. Brahmst which included a signature page, making it suitable for becoming a binding agreement upon execution by the parties. [9] Despite the apparent impasse on the no compete and no solicit provisions, the court reported that both sides believed they had in September 2007 reached agreement and signed a binding warrant agreement. The court did not explain how the parties arrived at these beliefs or which versions of the no compete and no solicit provisions were in their binding agreements. There were no contemporaneous records evidencing the parties’ beliefs in September 2007 about having signed a binding warrant agreement. [10] All the documents exchanged at this time were limited to paper versions; no digital copies of these materials were provided to the parties in the exchanges described above. [11] The letter was sent by certified mail, return receipt requested. [12] 2019 WL 3945950, 2 [13] As a general proposition, a party signing an agreement without reading it, in the absence of fraud, is going to find the agreement is enforceable. 6 William Meade Fletcher, et al., Fletcher Cyclopedia of the Law of Corporations §2585.10 (Westlaw, September 2019 Update), nn. 34, 35 & 36. [14] The court found it unnecessary to rule on the allegations that Ms. Kotler defrauded the Shipmans; nevertheless, Chancellor Slights’ dicta about this issue indicates such allegations most likely would have been unsuccessful. [15] Special thanks to Francis G. X. Pileggi of Eckert Seamons who first blogged about the Kotler Shipman litigation a few days after the decision, highlighting the risks of orphan signature pages and suggesting that counsel keep agreements and signature pages “together” at all times, “Fully Executed Contract Ruled Unenforceable,” Delaware Corporate & Commercial Litigation Blog (August 26, 2019) available at www.delawarelitigation.com/ (last visited September 18, 2019). [16] A phrase widely attributed to President Ronald Reagan in connection with the negotiation of nuclear disarmament terms with the Soviet Union. Also, claimed by some sources as a Russian folk proverb. [17] It is easy on a first reading of the opinion to be confused trying to keep track of the multiple drafts and negotiating positions. I was reminded of the Bud Abbot and Lou Costello classic “Who’s on First” vaudeville routine, available at https://www.youtube.com/watch?v=kTcRRaXV-fg (last visited September 12, 2019). [18] A working group list, often in tabular form, shows principal parties (including key individuals and respective support staff members at each entity), the respective advisers to the principal parties. The information on these lists would usually include individual names, employer name, position, mailing address, email, telephone and fax numbers and other contact information. Sometimes, particularly on larger transactions, these working group lists would note which parties on the list were to receive particular types of communications (all, only execution copies, none, etc.). Even without such helpful designations, the act of preparing the working group list usually triggers an informal discussion with support staff and clients about who was to receive which types of communications. [19] Breaches of this informal rule today are not subject to the same opprobrium as in years past, because most deal documents are prepared and circulated as electronic documents. If a party who does not hold the drafting pen prepares and circulates a revised draft, the other parties can easily redline the new draft against the old. Before relining software was readily available, reviewing a new draft for changes required one person to “read” the new draft aloud, one word at a time to a second person holding a copy of the last draft listening for any change or omission. [20] Mr. Brahmst prepared a September 25 draft reducing to 502 shares from 533 shares shown on his September 12 draft on instructions from Robert Shipman that Ms. Kotler had just agreed to 5% of undiluted equity and had undertaken to modify her copy of the agreement. The September 25 draft included an 18-month post separation no solicit and perpetual no compete. Mr. Brahmst did not circulate the September 25 draft. [21] The court noted that both parties thought that in September 2007 they had reached agreement and had signed a binding warrant agreement (2019 WL 3945950, 1), although a reading of the full opinion and the facts cited therein raises doubts about the accuracy of this assertion. Importantly, it appears that the company took no actions in the fall of 2007 consistent with the existence of a valid stock purchase warrant. Mr. Shipman failed before 2013 to take note of and review the September 17 warrant agreement executed by Ms. Kotler in 2007 that had been in the company’s possession since 2007. In addition, in 2009 when Ms. Kotler began to compete with theBalm, she was not told her warrant rights had been forfeited. During the litigation, the company explained that it had assumed the warrant was forfeited automatically and that no notification was needed. _________________ Richard M. Leisner 813-227-7461 Richard Leisner is an experienced expert witness in complex commercial litigation and legal malpractice cases. In addition, Richard enjoys a broad-based corporate and securities transactions practice. Richard has been recognized in every edition of The Best Lawyers in America (1983-2020), Corporate, Securities/Capital Markets, Securities Regulation and Corporate Governance Law. The post Guest Post: Can a Fully Executed Contract be Unenforceable? appeared first on The D&O Diary. Guest Post: Can a Fully Executed Contract be Unenforceable? syndicated from https://888migrationservicesau.wordpress.com via Tumblr Guest Post: Can a Fully Executed Contract be Unenforceable? Supermodel Jelena Noura “Gigi” Hadid was not the first celebrity to be photographed by paparazzi and then to post the resulting photo to social media, nor was she the first to be subsequently sued for copyright infringement for doing so. Other celebrities, including Jennifer Lopez and, most recently, Victoria Beckham, have made news for the same situation. This trend falls into an interesting intersection of two significant tenets of law: a celebrity’s right of publicity in their own image and a photographer’s right to copyright their artistic work. The district court dismissed the case due to a lack of a copyright registration. In addition to that defense, though, her attorneys also raised the defenses of fair use and implied license. The second may have begun paving the way for future legal challenges to clarify these issues by raising a novel argument—implied license—alongside the more typical defense of fair use. While an exclusive license must be in writing, a non-exclusive license can be verbal and an implied license may be “implied from conduct.” Graham v. James, 144 F.3d 229, 235 (2d Cir. 1998); see also 17 U.S.C. § 101. An implied license defense thus requires that an alleged infringer demonstrate that even without an express verbal or written agreement, the parties’ conduct indicates an intent to grant a license. Federal courts differ as to the precise requirements for an implied license and the cases typically are fact specific. Compare Meisner Brem Corp. v. Mitchell, 313 F. Supp. 2d 13, 17 (D.N.H. 2004) (finding that a nonexclusive copyright license may be implied where the licensee: (i) requested the creation of the work; (ii) the licensor created the work and delivered it to the licensee; and (iii) the licensor intended the licensee to distribute the work) with Pavlica v. Behr, 397 F. Supp. 2d 519, 527 (S.D.N.Y. 2005) (finding a similar claim can be established by showing: (i) the copyright holder had knowledge of the defendant’s conduct; (ii) the copyright holder’s action manifesting its consent to the defendant’s action was intended to be relied on, or the defendant had a right to believe it was so intended; (iii) the defendant was ignorant of the true state of the facts; and (iv) the defendant relied on the copyright holder’s actions to its detriment). In the Motion to Dismiss in Hadid’s case, her attorneys argued that she “stopped to permit the photographer to take her picture and, by posing, contributed to the photograph’s protectable elements.” XClusive-Lee, Inc. v. Jelena Noura “Gigi” Hadid, No. 19 Civ. 520, ECF No. 15 (E.D.N.Y. June 5, 2019), at *13. The Hadid court did not address this argument in its decision to dismiss the case, but it nonetheless raises intriguing questions for future cases. By posing, did Gigi Hadid request the creation of the work? By taking a picture of Hadid while she posed, did the photographer manifest consent to participate in their joint artistic work? By then posting the photograph on social media, was the photographer delivering it for Hadid’s use? Though not plead, the language of the Hadid filing seems to lay the groundwork for a potential argument of co-authorship of copyright in the photograph. That is, by posing, the subject contributed to the protectable elements and thus jointly created the work with the photographer. Indeed, the positioning of a subject of a photograph contributes to copyright ownership in a photograph. See Copyright Office Compendium §909.1 (“The creativity in a photograph may include the photographer’s artistic choices in creating the image, such as the selection of the subject matter, the lighting, any positioning of subjects, the selection of camera lens, the placement of the camera, the angle of the image, and the timing of the image.”). The question though is whether the subjects’ undirected and unique self-positioning would render the subject a co-author. The Copyright Act defines a joint work as one “prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary work.” 17 U.S.C. § 101. The typical standard for a joint work imposed by courts is fairly high, and requires, at least in the words of one court, “intellectual modification” rather than mere participation. Kyjen Co., Inc. v. Vo-Toys, Inc., 223 F.Supp.2d 1065, 1068 (C.D. Cal. 2002). The Hadid case raises interesting questions for joint authorship. For example, can the required intent of co-ownership be demonstrated by the subject striking a unique pose and the photographer capturing the pose? Is striking an undirected pose sufficient to meet the requirement of inseparability or of “intellectual modification” to create co-ownership interests? Hadid’s case, and the rash of other similar situations, underscores that this issue is sure to arise again and eventually be litigated for a court to decide. Stay tuned, as what follows may shape the interaction between celebrity and paparazzi in the age of social media for years to come.
via Tumblr #StrikeAPose #CopyrightInfringement Two of the most prominent examples of the rise of privacy-related securities class action lawsuits are the Cambridge Analytical scandal-related suit filed against Facebook in March 2018, and the Earnings Miss/GDPR-readiness and compliance-related securities suit filed against Facebook in July 2018. These two lawsuits were ultimately consolidated. In an interesting and detailed September 25, 2019 order (here), Northern District of California Edward J. Davila granted without prejudice the defendants’ motions to dismiss the consolidated lawsuit, finding that the plaintiffs had failed to adequately plead falsity and scienter. There are a number of interesting features to Judge Davila’s ruling, as discussed below. Background As discussed here, in March 2018, Facebook was the subject of extensive adverse publicity after it was revealed that user data for millions of Facebook users had been accessed by the U.K.-based political advisory firm Cambridge Analytica , which in turn used the information to profile users and target them with political advertisements. Among other things following the release of this information, Facebook and certain of its directors and officers were hit with a securities suit alleging that the company had mislead investors about the company’s privacy policy and protection of user information. Several months later, as discussed here, Facebook’s share price took a very substantial hit when, in connection with the company’s second quarter earnings release, the company announced that its growth during the quarter had been adversely affected by the company’s struggles to comply with the newly effective European privacy regulation, the General Data Protection Regulation (GDPR). These revelations and the related stock price drop also resulted in the filing of a securities class action lawsuit against Facebook and certain of its directors and officers. In an August 2018 order (here), Judge Davila granted the various plaintiffs’ motions to consolidate the previously separate securities suits. The order also resolved pending issues concerning the selection of lead plaintiffs. The lead plaintiffs then filed a consolidated amended complaint. As the Court subsequently noted, the plaintiffs consolidated amended complaint sought to recover damages in connection with a total of 36 allegedly materially misleading statements. The defendants filed motions to dismiss. The September 25, 2019 Order In a September 25, 2019 order, Judge Davila granted the defendants’ motion to dismiss, with leave for the plaintiffs to file an amended complaint. In reaching these conclusions, Judge Davila painstakingly reviewed each one of the allegedly misleading statements on which plaintiffs sought to rely. With respect to all but one of the allegedly misleading statements, Judge Davila concluded that the statements were not actionable because plaintiffs did not allege sufficient facts to support their allegation that he defendants lied to or misled investors. Among other things, Judge Davila specifically found that the statements on which the plaintiffs relied in order to argue that the defendants “misleadingly downplayed” the impact of the effect of the looming GDPR on business were inactionable. The one statement that Judge Davila found actionable was an October 2017 statement by Facebook COO Sheryl Sandberg that “When you share on Facebook, you need to know that no one’s going to steal our data. No one is going to get your data that shouldn’t have it … you are controlling who you share with.” Judge Davila found that the plaintiffs had adequately pleaded that users could not in fact control their data. However, with respect to this one actionable item, Judge Davila found that the plaintiffs had failed to allege facts sufficient to support a strong inference that at the time Sandberg made these statements that she acted with scienter; Judge Davila said in that regard that “Plaintiffs have provided no particularized facts from which this Court an infer that Sandberg consciously lied.” While Judge Davila granted the defendants’ motions to dismiss in full, he also noted that “it is possible that Plaintiffs can cure their allegations by alleging, among other things, more particularized facts as to why statements by the Individual Defendants were false when made.” In a footnote, Judge Davila requested further that if the plaintiffs chose to amend their complaint that “they make clear what the alleged misstatement or omission is and why it meets the standards of securities fraud.” Discussion It was clear from the outset of this opinion that the plaintiffs’ various claims in this consolidated action likely were not going to survive the dismissal motion. Judge Davila noted in his opinion’s first footnote that “At points, Plaintiffs’ consolidated class action complaint can be difficult to understand – it is hard to grasp exactly what Plaintiffs allege Defendants’ misstatements and omissions were and how they constitution a securities violation,” adding further that “Often, the Complaint simply reposts entire news articles, multiple times, without explaining to this Court why Defendants’ statements therein constitute actionable fraud.” The court’s difficulty in discerning why the various privacy-related events on which the plaintiffs sought to rely in order to support their claim of securities fraud were actionably fraudulent highlights the difficulty for prospective investor claimants seeking to translate news of a privacy-related violation into a securities claim. Indeed, the court’s difficulty underscores the challenge facing any prospective claimant seeking to convert any time of adverse event into a securities claim. However, the difficulty of converting privacy-related violations into a securities claim does not mean that plaintiffs’ attorneys will not continue to try to file these kinds of lawsuits. If nothing else, the massive share price declines that accompanied Facebook’s adverse privacy-related news are of a type and magnitude that are always going to attract the attention of the plaintiffs’ lawyers. In other words, even though the plaintiffs’ claims here failed to survive the initial pleading hurdles the adverse outcome here likely will not deter plaintiffs’ lawyers from filing privacy-related securities suits in the future. Besides, the dismissal here was without prejudice. It remains to be seen if the plaintiffs’ amended complaint will succeed in overcoming the pleading hurdles. It is not as if Facebook has gotten-off scot-free with respect to the Cambridge Analytica scandal. As readers will recall, in July 2019, Facebook agreed to settle the Federal Trade Commission’s enforcement action against the company in connection with the Cambridge Analytica situation for $5 billion. Facebook also separately reached a separate $100 million settlement with the Securities and Exchange Commission in connection with the company’s disclosures to investors in connection with the Cambridge Analytica situation. These separate regulatory settlements further reinforce my belief that, notwithstanding the plaintiffs’ failure here to overcome the initial pleading hurdles, privacy –related violations likely will continue to be a source of D&O claims in the months ahead, and in particular that privacy-related issues will be a source of securities class action lawsuits. Judge Davila’s specific conclusions that the plaintiffs had failed to allege actionable misrepresentations in connection with Facebook’s GDPR readiness is also interesting. At the time the lawsuit about the GDPR statements was filed, I noted the case as the first example of GDPR compliance leading to a D&O claim. Even though these allegations failed to meet the initial pleading hurdles, I continue to believe that GDPR-related developments could prove to be a significant source of privacy-related D&O claims in the future. Dismissal Granted in #MeToo-Related Securities Suit: Speaking of dismissal motions being granted in pending securities suits that reflect current securities class action lawsuit filing trends, on August 29 2019 Southern District of Florida Judge K. Michael Moore granted the defendants’ motion to dismiss in the securities class action lawsuit that had been filed against National Beveridge Corporation. Readers may recall that among the allegations on which the plaintiffs sought to rely were various supposed misrepresentations and omissions related to alleged sexual misconduct involving the company’s CEO. Judge Moore granted the defendants’ motion to dismiss with respect to all of alleged misrepresentations on which the plaintiffs sought to rely, including the alleged misrepresentations concerning the CEO’s alleged sexual misconduct. Judge Moore granted the motions to dismiss with prejudice. A copy of Judge Moore’s August 29, 2019 order can be found here. The post Facebook Privacy-Related Securities Suit Dismissed Without Prejudice appeared first on The D&O Diary. Facebook Privacy-Related Securities Suit Dismissed Without Prejudice syndicated from https://888migrationservicesau.wordpress.com via Tumblr Facebook Privacy-Related Securities Suit Dismissed Without Prejudice Opt-outs “remain a small yet significant part of the overall securities class action landscape,” according to a recently updated Cornerstone Research report written in conjunction with the Latham & Watkins law firm. The report, entitled “Opt-Out Cases in Securities Class Action Settlements” (here) notes that the opt-out rate has more than doubled in the most-recent four year period and that opt-outs remain more likely in larger dollar settlements. Cornerstone Research’s September 25, 2019 press release about the report can be found here. Opt-Out Numbers and Rate The research is based on a review of a database of 1,775 class action settlements from January 1, 1996 to December 31, 2018. Of the 1,775 settlements in the database, 82 (4.6%) involved opt-out cases. These overall figures are significantly affected by the increased opt-out rate in the most recent four year period. Of the 382 securities class action lawsuit settlements during the period 2014-2018, 34 (8.9%) involved opt-out cases. The 8.9% opt-out rate during the most recent four-year period contrasts with a 3.4% opt-out rate prior to 2014. The two years with the highest number and percentage of opt-out settlements during the 22-year period reflected in the database were 2016 (when 12 out of 85 settlements, representing 14.1% of settlements, involved opt-outs) and 2018 (when 10 out of 76 settlements, representing 13.2% of settlements, involved opt-outs). Case Law Developments Affecting Opt-Out Rate Recent case law developments may be a factor in the rise in the opt-out rate. As discussed here, in June 2017, the U.S. Supreme Court held in the California Public Employees Retirement System v. ANZ Securities that the Securities Act of 1933’s three year time limit is a “statute of repose” that cannot be tolled by the filing of a class action complaint. One of the practical consequence of this holding is that class members may not be able to wait until a class action has settled in order to determine whether or not to opt-out, as a result of which some investors may choose to pre-emptively file an opt-out action. As the report notes, the case law developments “may have factored into the relatively large percentages of opt-outs in the period 2016-2018, as putative plaintiffs may have decided to opt out preemptively in order to preserve their right to sue.” Opt-Outs Most Common in Larger Dollar Value Suits While opt-out cases represent a small but growing securities litigation phenomenon, it remains most relevant with respect to the larger dollar value settlements. Essentially, the larger the settlement is the likelier it is that there will be opt-out cases associated with the settlement. Thus, between 2014 and 2018, 28 percent of cases with class action settlements over $20 million involved opt-outs, while for settlements below $20 million the opt-out rate was only 2.1 percent. And while settlements over $20 million represented only 26 percent of all securities class action settlements during the period 2014-2018, they represented over 80 percent of the opt-out cases during the four year period. These trends are even more pronounced with respect to the so-called “mega” settlements (that is, settlements over $500 million). During the period 1996-2018, 15 of 23 settlements over $500 million (65%) had associated opt-outs. All four of the settlements over $500 million during the period 2014-2018 involved opt-out cases, compared with only 7.4% of all settlements below $500 million. Opt-Outs Motivations The motivations of the opting-out plaintiffs are easy to discern. As the report notes, “plaintiffs elect to opt out because of the potential for better outcomes.” There is some evidence to suggest that, indeed, opting-out plaintiffs do fare better than members of the class. Between 1996 and 2014 in reported settlements opt-out plaintiffs received an additional 13 percent over other class plaintiffs, while in six cases the opt-out premium was over 20 percent. The VEREIT Case Developments in connection with one recent securities class action lawsuit seem to reflect many of the settlement and opt-out trends noted in the report. As discussed here, in October 2018, and in connection with the securities class action lawsuit pending against VEREIT (successor in interest to American Realty Capital Partners) entered three separate opt-out case settlements with four large institutional investors totaling $217.5 million, while the class action itself remained pending. (A later separate opt-out case settlement brought the total of opt-out settlements to $245.4 million, and then later still, the company entered a further opt-out settlement, increasing the total value of the opt out settlements to $272.4 million.) Several institutional investors seemed to have opted-out preemptively, and also negotiated settlements separate from the class. In September 2019, the company reached a settlement of the class action of $738.5 million. Implications for Class Action Parties The increasing prevalence of opt-out litigation has significant implications for all of the parties. For defendants, if more institutional investors feel compelled to opt-out preemptively, this could “have the effect of driving up the cost of litigation … as they may need to defend multiple suits, sometimes in different jurisdictions.” Plaintiffs also could face increased attorneys’ fees and costs, as well as increased uncertainty. Discussion The report does not discuss it, but the increased opt-out rate has significant implications for D&O insurers as well, particularly for excess D&O insurers. The increased costs associated with opt-out litigation could not only significantly increase insurers’ overall loss costs, but could have the effect of driving loss costs into the higher-attaching excess layers. Increased prevalence of securities class action opt-out litigation represents a heightened severity risk for the excess insurers and significantly increases the risk to higher level excess players that their limits will be exposed either as a result of increased defense expense or as a result of the aggregate amounts paid to settle both the class and opt-out litigation. Class action litigation is often viewed negatively in the corporate and insurance world but it does have the undeniable advantage of efficiency. The increased splintering of previously collective litigation is in efficient, and it carries the risk of significantly increased costs. At a time when companies and their D&O insurers are already facing escalating securities class action frequency and increasing severity from securities class action litigation, merger objection litigation, and shareholder derivative litigation, this latest related-litigation dynamic is a very unwelcome development. I discussed these concerns about opt-out litigation in much greater detail in my blog post (here) written in connection with the VEREIT opt-out litigation settlements. The post Percentage of Securities Suits Involving Opt-Outs Increased in Most Recent Years appeared first on The D&O Diary. Percentage of Securities Suits Involving Opt-Outs Increased in Most Recent Years syndicated from https://888migrationservicesau.wordpress.com via Tumblr Percentage of Securities Suits Involving Opt-Outs Increased in Most Recent Years As many readers undoubtedly are aware, California’s governor recently signed into law legislation that would re-classify app-based workers as “employees” rather than as “independent contractors. As discussed below in a guest post written by John M. Orr and Jully Y. Rojas, these recent changes in California law could have national significance. The changes could have significant Employment Practices Liability Insurance implications as well. John is a Director in Willis Towers Watson’s FINEX (Financial, Executive & Professional Risk) division. Jully is a member of FINEX’s Claims & Legal Group. Both are resident in the firm’s San Francisco office. The authors wish to thank Talene Carter, Willis Towers Watson’s Employment Practices Liability product leader, for her insights and guidance. A version of this article previously appeared on the Willis Towers Watson site. I would like to thank John and Jully for their willingness to allow me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors in topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is John and Jully’s article. ************************************** The emerging nature of employment in todays “gig” economy has given rise to changes in the laws of the country’s most populous state. From the 2018 California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court (Dynamex), to the state legislature’s recent codification of Dynamex in Assembly Bill 5 (AB 5), many companies may be compelled to re-classify certain “independent contractors” as “employees.” Changes in worker classification have the potential to impact employers and employees relative to wages, unemployment benefits, employment practices liability insurance and beyond. Because of California’s well-earned reputation for being a first to enact transformative legislation, the issue has national significance. Background — The gig economy and growth in the use of independent workers The gig economy in 2019 is more expansive than ever, with the number of independent workers in the U.S. having increased by more than 19% in a 10-year period.[i]The gig economy, generally understood to include individuals paid by the “gig” (musicians, freelance journalists, ride share and truck drivers, or temporary workers), has grown, in part, due to greater accessibility to jobs through social networks and digital platforms that connect consumers seeking specific services to individuals who are willing to provide such services. With the expansion of the gig economy, independent workers have enjoyed access to new sources of revenue and new work opportunities. Employers who rely on independent workers also have benefitted from technology platforms that put them in touch with candidates. Notwithstanding these benefits, and as discussed below, a company’s classification of gig workers as independent “non-employees” may not hold up under state or federal law. In this regard, companies may be compelled to treat certain independent contractors as employees, giving rise to numerous corporate, employment and related financial issues. For many of these companies, whether a worker is an employee or independent contractor also impacts how they view their employment practices liability insurance program. Specifically, companies must question how many employees they actually have, in what locations they reside, and how they should be evaluating the adequacy of limits they purchase. Dynamex Operations West, Inc. v. Superior Court In April 2018, the California Supreme Court issued a landmark decision entitled Dynamex Operations West, Inc. v. Superior Court. In Dynamex, the state’s highest court adopted a test commonly referred to as the “ABC” test, which was a departure from the more traditional “right to control” test. Unless a business can satisfy the ABC test, an individual designated as a contractor by a company would be deemed, instead, to be an employee. For a business in the gig economy, this could result in the classification of hundreds, if not thousands, of gig workers as employees, and with it, increased financial responsibilities for the business. Under the ABC test, a worker is presumed to be an employee unless the hiring business can establish three factors for such worker to be properly classified as an independent contractor: A – The worker is free from the control and direction of the hirer in connection with the work, both under any contract for the performance of such and in fact. B – The worker performs work that is outside the usual course of the hiring entity’s business. C – The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity. The underlying case in Dynamex concerned a class action by delivery drivers alleging their employer, a trucking company, had misclassified them as independent contractors. The trucking company maintained that the classification of these workers as independent contractors was based on a contractual arrangement that deemed all drivers as independent contractors rather than employees. The drivers, however, argued the company’s misclassification led to numerous violations of California wage orders and the state’s Labor Code. The court analyzed the classification issue in the context of wage orders, which impose obligations relating to wages, maximum hours and basic working conditions of California employees. Recognizing the history and purpose of the wage orders to provide protection to all workers who would ordinarily be viewed as working in the hiring business, the court held that the proper standard to determine if a worker is properly considered an independent contractor is the ABC test articulated above. Notably, Dynamex represents a departure from prior state case law which sets forth a multi-factor standard to distinguish employees from independent contractors. (S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 [1989]) Under Borello, a principal factor was the “right to control” — whether a hiring business had the right to control a worker’s manner and means of accomplishing the services provided. By replacing it with the new ABC test, Dynamex moved away from a standard that emphasized “control” and replaced it with a broader standard requiring, among other factors, to show that a worker performs work outside the usual course of the hiring business. Thus, when determining whether a worker is an employee or an independent contractor for purposes of obligations imposed by a wage order, the ABC test is the new legal standard that applies in California. California Assembly Bill 5 — Dynamex codified On the heels of Dynamex, in September 2019, the California legislature passed AB 5, scheduled to take effect January 1, 2020. The new law largely codifies the ABC test adopted in Dynamex, meaning the test would serve as the standard in California for determining employment status. While certain industries or professions are exempt — such as doctors, architects, engineers and independent hair stylists — industries, such as the ride share industry, are not. As of this writing, debate remains on the extent of impact the law will have on these companies. In this regard, arguments have been made challenging whether the work that the independent contractors do falls within the “usual course” of the companies’ business. Stated differently, Dynamex and AB 5 may have established standards for the classification of workers in the state, but whether those standards will or will not apply to any given company may need to be resolved in potentially time-consuming and costly litigation. In addition, many affected companies are backing efforts to put the issue before the California voters, pledging millions of dollars in support of a ballot initiative that could have the effect of undoing AB 5. How Dynamex has played outside California Although Dynamex and AB 5 represent the standard to determine the independent contractor vs. employee question in California, the standard is not followed in all jurisdictions. For example, the Department of Labor (DOL) opined recently on whether gig workers in a “virtual marketplace company” are properly classified as employees or independent contractors under the Fair Labor Standards Act (FLSA). Unlike the ABC test in Dynamex, the DOL’s focus is on whether a worker is “economically dependent” on a potential employer. In determining such economic dependence, the DOL applies a six-factor test, including the nature and degree of the potential employer’s control. In this case, the hiring business provided an online and/or smartphone-based referral service connecting workers to end-market consumers to provide a wide variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting and household services. According to agreements in place, only the workers would provide services to consumers in the virtual marketplace, and the gig workers (or service providers) were classified in the agreements as independent contractors. Applying the facts to the six-factor test, the DOL concluded that the gig workers were independent contractors, not employees, as the facts demonstrated economic independence rather than economic dependence, in the working relationship between the hiring entity and its service providers. Similarly, in an opinion letter of its own, the National Labor Relations Board (NLRB), through the Office of General Counsel, determined that certain drivers of ride-sharing company are independent contractors, not employees, for purposes of the National Labor Relations Act. In making that determination, the NLRB applied a common-law agency test by examining the factors through “the prism of entrepreneurial opportunity” set forth in prior NLRB precedent. Weighing in favor of these drivers as independent contractors was the fact that they have “virtually complete control of their cars, work schedules and log-in locations, together with their freedom to work for competitors.” According to the NLRB, these factors provided them with significant entrepreneurial opportunity given that, at any moment, “the drivers could decide how best to serve their economic objectives: by fulfilling ride requests through the App, working for a competing ride-share service, or pursuing a different venture altogether.” These cases demonstrate that there is no one test or uniform standard that answers the question of whether workers are properly classified as independent contractors or employees. When viewed through the lens of Dynamex and AB 5, it appears that the status of gig workers as independent contractors could be more difficult to establish under the ABC test. Companies that are based on a gig platform whose core services are to provide connections between contractors and customers would have to show that services provided by a gig worker are outside of the company’s core business — a fact that could prove difficult for companies to establish. When viewed through the lens of other standards or through the prism of “entrepreneurial opportunity,” however, the outcome could very well be different and favor an independent contractor status. Impact on employment practices liability insurance When companies purchase employment practices liability (EPL) insurance, a threshold area of underwriter inquiry is headcount. How many employees does the company have overall? How has the number of employees changed year over year? How is headcount broken down by location? Pre-Dynamex, answers to these and similar questions were quantifiable in nature. Post-Dynamex and AB 5, the answers may be complicated by broader legal scrutiny. The cost of EPL coverage potentially lies in the balance. Another factor for companies to consider is how changes in employee count should affect the amount of insurance the company purchases. If the Dynamex decision and AB 5 force certain companies to acknowledge a headcount increase, how does that affect decisions to increase limits of liability and, if so, by how much? Seeking guidance from their insurance broker will be essential to addressing these questions. Finally, affected companies should seek the guidance of their brokers on specific EPL policy wording that may be negotiated to mitigate coverage uncertainties. Although traditional EPL policies are not designed to cover employee classification and related wage claims, companies may wish to explore customized wording to ensure that the extent of new risk emerging from Dynamex and AB 5 is addressed as they intend. Takeaways Just as the gig economy is evolving, so too are the laws with respect to classification of workers. The import of Dynamex and AB 5 in terms of scope and effect remains to be seen. As a result, whether workers are classified as independent contractors or employees should be an often-asked question — the answer today may not be the same down the road. In light of potentially conflicting authorities, the classification and treatment of workers will give rise to numerous issues ranging from how classification should be handled, whether there are contractual or other legal workarounds, to how EPL insurance may be impacted. Ultimately, companies should confer with employment and corporate counsel, as well as their insurance brokers. ___________________ [i] Istrate, Emilia and Harris, “The Future of Work: The Rise of the Gig Economy,” National Association of Counties, November 2017, https://www.naco.org/featured-resources/future-work-rise-gig-economy The post Guest Post: Classifying Gig Economy Workers under Changing California Law appeared first on The D&O Diary. Guest Post: Classifying Gig Economy Workers under Changing California Law syndicated from https://888migrationservicesau.wordpress.com via Tumblr Guest Post: Classifying Gig Economy Workers under Changing California Law The 2019 National Advertising Division (“NAD”) closed out its Annual Conference with an update from Laura Brett, the Director of the NAD, and Alexander Goldman, an attorney with the NAD. The update focused on three main points: NAD statistics from the past year, NAD practice pointers, and the future of the types of cases being brought at NAD. StatisticsFirst, competitor challenges are trending toward a one third growth for 2019 as compared to 2018, while simultaneously decreasing the time to decision on challenges from 113 days on average to 100 days. Needless to say, the NAD is committed to promptly moving cases through the process. Ms. Brett made a point to bestow some well-deserved praise on her team for their hard work throughout the last year. Major product categories subject to NAD challenges continue to be: appliances/consumer electronics/household products, drugs and dietary supplements, food and beverage, and telecom/entertainment. Whereas some categories are noticeably absent from NAD proceedings including automobiles, clothing and cosmetics, industrial products/office supplies, and travel/lodging. In addition, Mr. Goldman made the point that there remains a noticeable lack of service-based challenges at NAD despite services accounting for a large part of the U.S. economy. Practice PointersSecond, Ms. Brett and Mr. Goldman provided practice pointers in three areas: procedure, appeals, and testing and emerging science. The NAD updated its procedures to require a challenger to specifically list all claims that are subject to the challenge. Since the procedural update, the NAD has been lenient on this requirement. However, moving forward, failure to adhere to this rule may result in requiring the challenger to update and resubmit their challenge to the NAD. Ms. Brett provided advice on how a competitor should approach an appeal. Often, competitors focus too closely on the competitive aspect of an appeal and forget about the consumer’s perspective in their argument. This can lead to the consumer’s voice being lost from the argument, because NAD no longer argues appeals. Ms. Brett suggested that practitioners, on both sides of the appeal, should put themselves in the shoes of the consumer and include arguments from a consumer’s perspective when arguing before the NARB. With regards to new testing and emerging science, Mr. Goldman stated that advertisers need to stay on top of new evidence and ensure that testing is up-to-date as it applies to a claim. He also suggested that advertising claims based on emerging technology be properly qualified to guarantee consumers understand the nature of the testing supporting the claim. A Look Toward the FutureFinally, Ms. Brett and Mr. Goldman looked toward the future. Ms. Brett continues to expect strong support from the FTC and a bolstering of the NAD process. Ms. Brett also expects FTC referrals to continue to be timely resolved based on a study conducted earlier this year that focused on the last four years of NAD referrals to the FTC. Of the FTC referrals studied, 80% resulted in an inquiry from the FTC and the vast majority of those resulted in amended advertising claims. There have already been six referrals to the FTC in 2019. In all six of those challenges, the advertiser contacted NAD and agreed to participate in the process before the FTC could take its own action. Ms. Brett also noted that NAD has seen an uptick cases involving “Made in America” claims; challenges where retailers are responsible for the advertising claims; challenges concerning consumer review; star ratings claims; and #1 claims. Ms. Brett and Mr. Goldman took this opportunity to expand on three of these types of claims. As to challenges concerning consumer reviews, Ms. Brett noted advertisers should be careful not to use a consumer review to make a claim broader than what is supported by the consumer review. For star ratings claims, Ms. Brett stated that a disclosure is required if an advertiser incentivizes a consumer to provide a review, even when the star ratings are consolidated. Mr. Goldman explained that #1 claims tend to be very broad. Because of that, unit sales figures, not revenue, are typically the best substantiation for a #1 brand claim. Basing a #1 claim on revenue is not the best method, especially when the price of similar products may vary. Mr. Goldman went on to say that the brand category measured should reflect both the consumer’s and competitor’s view of the product category. In sum, the NAD has been working harder and more quickly than ever. NAD enjoys strong support from the FTC and has benefitted from the FTC’s opening of investigations into advertisers who fail to participate in the NAD process. Increased efficiency and greater downside for failing to participate will continue to strengthen the NAD as an alternative dispute forum for advertising challenges.
via Tumblr An NAD Update Last week, the Federal Trade Commission (FTC) announced a $1.76 million settlement with Truly Organic, Inc. and its founder and CEO Maxx Harley Appelman regarding false “organic” claims. This is the first time the FTC has obtained monetary relief for deceptive “organic” claims, and the buzz around this settlement signals it may not be the last. The Commissioners’ vote was unanimous, and Commissioner Rohit Chopra released a statement in support of the settlement calling for the FTC to issue a Policy Statement setting forth the Commission’s approach to enforcement in cases involving dishonesty or fraud. Truly Organic is a bath and beauty retailer that makes and sells a variety of personal care products, including hair care products, body washes, lotions, baby products, and cleaning products. As the brand name suggests, Truly Organic markets its products as wholly organic or certified organic in compliance with the United States Department of Agriculture’s (USDA’s) National Organic Program (NOP), the program that enforces national standards for organically produced agricultural products. Truly Organic conveyed the organic theme through a variety of claims, including “100% organic,” “truly organic,” “certified organic,” and “USDA certified organic.” The company also claimed its products were “vegan.” According to the complaint, however, Truly Organic’s products are neither “true” nor “organic.” The FTC contends that none of True Organic’s products have been certified in compliance with USDA’s NOP. Further, many of Truly Organic’s products contained ingredients that were not organic or contained no organic ingredients at all. In some instances, Truly Organic used non-organic ingredients, such as non-organic lemon juice, when it could have sourced an organic version. Other products included ingredients that USDA prohibits in organic products, such as cocamidopropyl betaine and sodium cocosurfactant. A number of products were also marketed as “vegan,” yet they contained non-vegan ingredients like honey and lactose. In addition to the $1.76 million settlement, the Order also prohibits Truly Organic and Appelman from making misleading claims in the future about whether its products are “organic” or “vegan.” Notably, the Order also covers any claims regarding the “environmental or health benefits” of any Truly Organic product. These fencing-in provisions indicate that the Commission recognizes that misleading environmental and product-attribute claims cause harm to consumers and industry alike. The Commission’s unanimous vote approving the settlement shows that all five Commissioners support stepping up enforcement against deceptive organic claims. Commissioner Rohit Chopra’s separate statement praised the Truly Organic settlement for “reflect[ing] a difference in approach compared to other matters inherited over the last year,” where cases regarding fraudulent claims “were resolved for no money, no notice to victims or competitors, and no findings or admissions of liability.” Commissioner Chopra stressed that “[i]n cases involving such conduct, no-money settlements are inadequate, and the Commission should commit itself to exercising its full authority to protect consumers and honest businesses.” Consumers are willing to pay more for organic products. Companies marketing “organic” and other product-attribute claims should take note: The FTC is serious about deceptive claims in this space and is likely to take further action in the near future.
via Tumblr The FTC Gets Real About Fake “Organic” Claims |
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