Last week, Abercrombie & Fitch CEO Mike Jeffries admitted he didn’t make A&F clothes in larger sizes. His reasoning: beautiful thin people attract other beautiful people to wear A&F’s clothing; and unattractive fat people detract from his stores. Then came the immediate firestorm of fury on social media sites like Twitter and Facebook, encouraging people never to shop there. One consumer even bought A&F merchandise and handed it out to the homeless (his idea of a brand readjustment).

For A&F’s part, it remained silent. No doubt Mr. Jeffries got a tongue lashing lecture on tact from his board of directors, but nary an official comment came from HQ, and Mr. Jeffries is now noticeably out of the press. Regardless of what can be gleaned from the company’s silence, it probably did the right thing. A brand owner’s response to its detractors can become part of the brand if not deftly handled. Worse, attacking the messengers, no matter how unfair the criticism, is liable to bring out the worst in all of us. Amy’s Baking Company learned that lesson this week.

Like thousands of people across the country, many at this law firm were riveted this week by the story of Amy and Samy Bouzaglo, whose bizarre television appearance and on-camera behavior on Gordon Ramsay’s Kitchen Nightmares catapulted them to infamy overnight. Although the buzz on the couple has not died down, and the lessons learned are still trickling in, one thing is sure: in the social media age, more than ever, a brand embodies the personality of those at the helm, and social media magnifies their warts and, thereby, those of the brand. How you respond in a digital world is as important as the product you put out.

Amy and Samy Bourzaglo appeared on an episode of Kitchen Nightmares, asking for help from television chef and restaurant turnaround king, Gordon Ramsey, to rejuvenate their failing restaurant. At the outset, the couple believed all their problems stemmed from some unfair and vicious reviews on Yelp! It didn’t take long, however, for the cameras and Ramsey to light on the real problem: poorly prepared – and often bizarre – food, a painfully slow kitchen, abusive owners who admit to stealing tips from the wait staff and serving store-bought food, and who verbally abuse and eject customers who complain about undercooked pizza or long wait times.

Watching the married restaurateurs make one public relations blunder after another on national television, in newscasts, and on social media sites made most of us wince and laugh at the same time. No doubt, the Bourzaglos episode will be among the highest rated. Yet, it’s not likely the couple or their brand will recover from it, largely because in the face of harsh criticism it chose to lash out. Here’s what their gaffes can teach us.

Social Media Is Difficult To Control: Companies cannot always control the messages of consumers and should not try.

Numerous websites and news organizations have covered what has now become known at “The Meltdown, ” in which Samy and Amy, owners of Amy’s Baking Company, lash out at Facebook users’ messages that take issue with them for bad food and stealing their servers’ tips. In response, Samy and Amy hurl vitriol at their users, calling them losers, haters, morons, and liars, hurling epithets, and using profanity and shouting (through the use of ALL CAPS) to punctuate their points.

When it became clear they were on the losing end of a media battle, the couple removed their vitriolic postings (which also removed the 10,000-plus comments), and claimed their page had been hacked. This significantly slowed down the hate-traffic on Facebook, but it did something worse, it moved people to Yelp!, where Samy and Amy could not manually remove the posts.

While Facebook has some tools that allow internal management of one’s online presence, other sites, such as Twitter (in which individual users can aggregate tweets using hashtags) do not allow for interference from third parties. Companies should recognize the potential damage that can be caused to a brand before trying to quash bad press with censorship attempts. In the end, it could leave them playing “whack-a-mole” with other, less controllable sites. And leave them explaining not only their comments, but their attempts at censorship.

The Dog Catcher Shouldn’t Call the Vet a “Hairball:” People will stop at nothing to undermine your message if you undermine them, so don’t.

When Abercrombie’s CEO dipped his foot in the holier-than-thou water of beauty, he probably realized people would call out his own lack of attractiveness, but people dug deeper still to hurt the brand that hurt them. For example, former employees responded by revealing A&F’s policy to intentionally damage clothes with scissors rather than make them a available for donation to the poor.

Similarly, when Amy Bourzaglo began a flame-throwing digital tirade against the criticism she received for stealing her employees’ tips, calling online fans fakes, morons, frauds, and thieves, they struck back with a vengeance. It didn’t take long for the public to learn she was the fraud. The deep-digging public was quick to disclose Amy (her real name, Amanda) was convicted of using a fake social security number and sentenced to 14 months in prison. Soon after that revelation, likely in response to Amy’s continuing sound-off,, one concerned member of the public started an online petition to have the federal government investigate her for illegally taking the tips of her waitstaff. Query whether a simple apology from Amy for her objectively bad behavior rather than an attack might have left her in a better position.

Perhaps Amy should have taken a page from the PriceChopper book. In 2010, a shopper at Price Chopper sent out a negative tweet and photo when she saw a pile of garbage in one of the aisles. The PriceChopper social media employee might have replied to the tweet with an apology about the store’s condition, but instead, in a move that makes one wonder whether Amy was at PriceChopper at the time, called the tweeter’s employer and demanded disciplinary action. Unthinkable. Finding itself in the midst of a customer relations nightmare entirely of its own making, the company got wise and issued an apology, going so far as to agree to participate in a social media conference to discuss how the situation escalated. Amy has yet to have such a revelation and make any attempt to make up for her objectively inappropriate actions.

The digital age, the easy availability of decidedly personal and embarrassing information, all coupled with the ability to disseminate the information through social media should be warning enough that defending oneself online by attacking the messenger is a bad idea.

Whoever is at the Helm is at the Heart: Social Media Means Every Action Affects the Brand.

There was a time when a comment from a spokesperson might be isolated to a tiny news story that only a handful of people saw. The scuttlebutt about “last night’s comments” would end at the water cooler, and at worst, the company could issue a statement distancing itself from whatever embarrassment happened the day before. In all likelihood both would go unnoticed.

Today, a company spokesperson IS the brand and the likelihood than anyone will not have heard whatever faux pas he or she uttered is zero. Moreover, because social media has the tendency to amplify a statement, perhaps beyond its original intent, a brand can quickly go from riches to rags over the smallest infraction.

Consider the 2010 case of the Susan G. Komen Foundation, in which Karen Handel became the face of the organization after she announced the Foundation’s decision to defund Planned Parenthood. Although it was a decision she was not solely responsible for making, she became the brand identity overnight. Against a stream of bad press, Handel was forced to resign in order to offer the brand any hope of rehabilitation. 20 years ago, her comments might have been a blip on the radar. Social Media has changed the intensity of the spotlight.

Mike Jeffries’ recent statements are not likely to destroy the Abercrombie brand, largely because his brazen manner and off-the-cuff remarks are not foreign to consumers and Abercrombie has not fanned the social media flames to push consumers away. Some might argue his comments which were global in nature and not personal attacks are even consistent with a brand whose goal is to remain patrician and elite. Amy and Samy may not be so lucky. Amy’s Baking Company – through its owners’ words and actions – is now synonymous with deceit at best and mental illness at worst, forcing would-be restaurant patrons to consider whether a visit is worth the predicted abuse. If the company is to come back from the disaster the coupled fomented, their contrition should come quickly.

The World Loves a Comeback: Social Media Can Be a Brand’s Salvation.

Contrition goes a long way. Just ask Gilbert Gottfried who got a second chance after a heartfelt apology for making insensitive jokes about the Japanese after its horrific earthquake. While AFLAC quickly terminated his duck-spokesperson contract after the incident, his apologies got his fan base to urge the insurance company to bring him back.

Similarly, when a rogue tweet made the Red Cross appear as if its volunteers were drinking on a disaster site, the Red Cross took quick action. The company’s quick response (which included a humble note that it had confiscated the keys) was so heartfelt and human, the guffaw went from a PR nightmare to a compassionate call to action, with consumers using social media to call for and collect donations to support the nonprofit’s mission.

Time will tell whether Amy and Samy will admit their mistakes – social media and otherwise – and seek forgiveness from their fan base. That the company claimed the horrific comments made on their Facebook page were the result of being hacked when clearly they were not does not bode well for their turnaround. That said, if they decide on brand rehab, the very tools that brought them down could make them stars.

Since its release in March, 2013, “.com Disclosures” is the new hot read among ad law geeks and insomniacs, but it should be on the desk of every mobile and digital marketing executive in America. The FTC is taking the hard line when it comes to disclosures on electronic and tiny screens, and failure to act could result in some one-on-one time with FTC.

Acknowledging digital advertising – particularly mobile advertising – often has space constraints, the FTC nevertheless is tightening the reigns on disclosures in them. Its new guidelines clearly suggest the FTC means to uphold the mandate of Section 5 of the FTC Act (the “Act”), regardless of the medium.

The new dot com guidelines are not a rewrite of the Act; the rules are the same. They are a clear acknowledgement, however, that digital advertising is not immune from the Act’s proscription on deceptive ads or practices, that digital advertising can be more deceptive than other forms of advertising, and that advertisers are going to have to take care not to ignore their obligations. Perhaps most importantly, the new guidelines serve as an advertising roadmap for how the FTC will review digital advertising pursuant to investigations relating to false advertising. As the advertising world balances space constraints and digital advantages of using certain media with its obligation to make disclosures and disclaimers clear and conspicuous, the new guidelines suggest the FTC is closely watching.

Online advertisers have long been engaged in the practice of placing disclosures and disclaimers below the initial window seen by a consumer, the area colloquially known as “below the fold.” While the new guidelines acknowledge practical considerations may require disclosures to be in inconvenient locations, it’s clear the FTC will be scrutinizing the distance between the claim and any disclaimer. Similarly, the FTC has taken into account flash technology, making clear it will examine whether other parts of an ad are designed to “distract attention for [from?] the disclosure,” even with the requisite information present.

The FTC understands the consuming public is no longer viewing digital content on the large screens on their desktops and laptops, but rather has migrated to handheld devices, such as tablets and smartphones. The guidelines make clear advertisers are required to consider the medium, eliminating an advertiser’s defense that its disclosure was present but designed for a bigger viewing screen.

When space constraints do not enable the advertiser to place the disclaimer or disclosure near the ad claim, the FTC will be looking for a conspicuous link in close proximity to the claim. The guidelines go on to identify that this link must convey the importance of the information contained in it, must be as close as possible to the relevant ad claim, and must be in a style that conveys it is an actual link to more information. In fact, the new guidelines specifically require that – no matter how it’s done – the disclosure must be displayed before the consumers makes a decision to buy. By example, it states “before they ‘add to shopping cart.’”

None of the foregoing should surprise advertisers, given the Act’s longstanding requirement that consumers have reasonable access to information they need to make an informed decision, but the FTC is going further, taking advantage of technology’s ability to provide advertisers with consumer behavior information: the guidelines require monitoring of any linked information to determine whether the placement is effective. We can infer from this new direction that the FTC’s tolerance for advertiser excuses is waning, and it will be looking to linked disclaimer feedback as a determinant of intent to deceive.

Closing the door on, “but judge, I had no choice but to leave out the disclaimer,” the new guidelines make clear that if an disclosure is needed to clarify the ad and it cannot be practically displayed, the ad should not run. Period.

The digital frontier is meeting the industrial age. Advertisers have long been able to take advantage of ambiguous loopholes as they related to the ad-technology space, but the door seems to be closing on defenses to misleading the public. Advertisers will continue to hawk their wares online, to be sure, but the arbitrage opportunity window is narrowing.

The Nielsen Company, LLC v. Truck Ads, LLC (Jan. 24, 2011)

This dispute began as a feud between two trucking companies regarding maps depicting marketing areas. Neilsen sued claiming that the Neilsen maps were protected by copyright as compilations; and, that Truck Ads’ display of those proprietary ads on their website was copyright infringement.

Truck Ads denies that it has posted the Nielsen ads on their website; and, in the alternative, if they did that the Nielsen maps are uncopyrightable.

The parties were focusing their dispute on whether the maps were copyrightable, but then Truck Ads took an unescalating step of filing a declaratory judgment counterclaim asserting that Nielsen is misusing their copyrights against Truck Ads.

Nielsen moved for summary judgment on the grounds that copyright misuse is a defense and not a cause of action.

Judge Rebecca Pallmeyer of The Eastern Division of the Northern District of Illinois rejected the copyright misuse defense as a vehicle for affirmative relief for the reason that the condition precedent to a copyright misuse arising is absent. The court held that there is no claim that the underlying infringement claim is wholly lacking in merit. “Plaintiff’s allegation that Defendant acted unlawfully when it chose to copy Plaintiff’s maps is not frivolous, unsupported by law, or clearly contradicted by the facts in the record, as it must be to constitute copyright misuse.”

Plaintiff’s motion to dismiss was granted.

Fodere v. Lorenzo (Feb. 3, 2011 S.D. Fl.)

Defendant, Compacstone, sells marble and quartz for home, particularly kitchen, installation; and hired Plaintiff Fodere to photograph a kitchen featuring defendant’s marble and quartz. Defendant and Plaintiff, both speaking Spanish, negotiated the permissible uses that may be made of the resulting photographs. This oral license was in addition to an invoice that included a written heading “Rights Licensed” under which the words “for public relations, collateral and website usage for an unlimited time” were written.

Fodere sued for copyright infringement claiming that Compacstone’s use of the photograph in a magazine advertisement exceeded the terms of the rights license and constituted copyright infringement. She demanded one thousand dollars in compensation for the unauthorized use; and sued after her demand letter went unanswered.

Compacstone responded with the defense that Fodere had orally granted a license to advertising usage and recalled that in that conversation during which both spoke Spanish, both agreed that the photographs could be used in “para publicidad” which translates as ‘advertising’.

In a 17-page opinion, the Miami District Court lays out a comprehensive analysis of copyright infringement and focused on Fodere’s deposition testimony in which she agreed that she had that discussion and that “publicidad” translates as “advertising”. The court ruled the Plaintiff granted Defendant an oral nonexclusive license to use the photograph and that the license included the right to use the photograph in advertisements. The defendant’s summary judgement motion was granted; and the action dismissed with prejudice.

Estate of Curtis v. Chambers and Globe Specialties, Supreme Court of Massachusetts, Case No. 10662 (Jan. 18, 2011)

Harold Curtis designed and produced unique and distinctive printed promotional and advertising materials used by automobile dealerships to conduct direct mail campaigns and advertise dealership sales events. In 2000, Globe was rebuffed by Curtis after Globe offered to license and distribute Curtis’ materials. Curtis grew angry when Globe and Chambers subsequently began selling promotional and advertising materials that ” “[t]o an ordinary observer … were substantially similar to those produced by Curtis,” and the Chambers defendants ceased doing business with Curtis. Curtis demanded in writing that the defendants terminate their conduct, but the demand was ignored. Because the promotional materials published and distributed by Globe Specialty for the Chambers defendants were used so often in the same marketing areas served by other Curtis automobile dealership clients, Curtis could no longer sell his promotional materials and services to the automobile dealerships in these marketing areas.” (1/18/11 Opinion)

The state trial court reviewed the 2006 complaint that included copyright and common law trade dress claims. The copyright claims were dismissed as the judge concluded that Curtis had “not registered any copyright for the advertisements at issue, and copyright registration is a condition precedent to bringing an infringement action.” (1/18/11 Opinion) The trial court also dismissed the trade dress claims as preempted by the copyright claims that were erroneously pled.

Curtis died, and his estate filed the appeal with the Massachusetts Supreme Court which affirmed both the dismissal of the copyright claims and the trade secret claims.

Sellify, Inc. v. Amazon.com, Inc., (SDNY 11/3/10)

Sellify, aka ‘One Quality’, went in and out of business minimally while buying and re-selling used electronics on eBay.

Cutting Edge Design (CED), an Amazon associate, purchased the keyword “onequality.com” and several close variants from Google, Inc. When a Google user searched for these keywords, the search results were accompanied by an ad stating “Don’t Buy from Scammers” or “Beware the SCAM Artists” and linking to Amazon’s website. CED alone and without the knowledge of Amazon designed, implemented and purchased these ads. After a second demand letter from Sellify, Amazon terminated CED’s account.

Sellify sued both CED and Amazon for false advertisement. Amazon moved for a dismissal of Amazon from the suit as it had neither direct or secondary liability. Amazon pointed to an absence of all knowledge plus demonstrated that there was no agency between CED and Amazon.

The court granted Amazon’s motion to dismiss finding no direct or secondary liability. The court noted that the mere act of allowing another to link to one’s website, even if undertaken for commercial gain, could not support a finding of apparent authority.

Forest River, Inc. v. Heartland Recreational, USDC Northern Indiana 3:10-CV-11-TS

Competitors in the travel trailer industry, Forest sued after Heartland copied the Forest floor-plan and did two separate things with the plans. First, Heartland used the Forest floor-plans to create Heartland travel trailers allegedly in violation of the Architectural Works Copyright Protection Act (AWCPA); and second, that Heartland copied into a Heartland advertisement the Forest floor-plan in violation of Section 106 rights (which Heartland defends as protected by the fair use doctrine).

With regard to the first copyright claim, the Court noted both that travel trailers are useful articles and that AWCPA explicitly excludes recreational vehicles from the definition of architectural works. 37 C.F.R. § 202.11(d). Moreover, the Regulations implementing the Copyright Act, as amended by the AWCPA, define the term “building” as “humanly habitable structures that are intended to be both permanent and stationary, such as houses.” 37 C.F.R. § 202.11(b)(2).

“The legal issue before the Court is whether a copyright in a technical drawing of a non-architectural useful article precludes another party from using copies of that drawing to construct the useful article.”

In dismissing the claim, the court held:

“The Court could locate no post-AWCPA decision that recognized the distinction the Plaintiff requests when referring to useful articles depicted in drawings protected under § 102(a)(5) as technical drawings. To the extent the Plaintiff’s Amended Complaint attempts to assert a claim for copyright infringement on the basis that the Defendant manufactured travel trailers using copies of its Floor Plan, that claim fails as a matter of law. The Defendant was entitled to manufacture and market its own travel trailer, even one with the same layout as the Plaintiff’s.”

While the court dismissed the first copyright claim, the second copyright claim, “Use of the Floor Plan in Comparative Advertising” is allowed to go forward toward trial. This travel trailer case is moving on down the road. Discovery and a fair use analysis will be just around the corner. Stay tuned.

The FTC and Nestle have come to an agreement: Nestle will stop making health claims about its BOOST probiotic product, and the FTC won’t fine the company for false advertising.

Nestle had previously claimed in its BOOST advertising, that the nutrition drink would boost children’s immune systems, prevent illness, and even speed up the recovery of certain symptoms, like diarrhea. The website, and advertising material now states, “Many countries worldwide have a tradition of introducing live active cultures (bacteria) to infants and children early in life, in fermented foods, such as yogurt. In adequate amounts [probiotics] provide specific health benefits to the host.”

This case marks the FTC’s first foray into health claims based upon probiotics and suggests this is a new area of concern for the regulatory agency.

Practice Note: While the US has only recently been looking at probiotic food claims, the European Food Safety Authority has been heavily regulating the industry for the better part of a year. According to published reports, the EFSA has rejected 80% of the advertising claims involving probiotics. Attorneys should advise clients to be careful about health benefit claims under the current administration.

Nothing says “economic depression” so much as when scam artists run con-games on the weakest citizens: the infirm, the old, and now, unemployed students and recent graduates without money.

The FTC issued a release last week, suggesting confidence games against unemployed students are back in vogue, in the form of “secret shopper” scams. Sites, similar to this Mystery Shopper site, entice students by touting an hourly wage in excess of $20.00/hour, “just for shopping and dining out” and writing reviews (the foregoing site has not been targeted by the FTC and the author makes no claims as to the legitimacy or illegitimacy of the site; this site serves as example only).

Here’s the catch: in order to start collecting money, students have to either pay a membership fee, or deposit a bogus check sent to them (as “advance”). In the former case, the membership fee is collected, but no money is forthcoming (“No one wants your review. Sorry.”). In the latter scenario, the company’s check bounces, and gets returned with the depositer’s account information on it, and money is removed from the account. The FTC found that Independent Marketing Exchange, Inc. engaged in such fraudulent business practices.

Working as a bone fide “secret shopper” is a legitimate undertaking and some companies are actively seeking — and paying — shoppers for real reviews. The money, however, is typically not of the sort that will net anyone a full time income. Moreover, according to the FTC, legitimate “secret shopper” companies do not ask for money up front and do not ask members to deposit checks prior to conducting any work. While not dispositive of a bogus company seeking to defraud people, these “red flags” should be heeded by those looking into this line of work.

Practice Note: Advise clients who run such a business to steer clear of deceptive business practices such as charging membership for a secret shopper program, even if the business is a legitimate one. Such practices may subject a business to FTC investigation and complaints.

They’re cute, they make noise, they might even get your kid to eat his breakfast, but boost immunity? The FTC says not so much.

For the second time in a year, Kellogg’s has been put on the hot seat for its cereal related health claims. This time, Kellogg’s claimed that because Rice Crispies contains “25 percent Daily Value of Antioxidants and Nutrients — VItamins A, B, C, and E,” eating a bowl would boost a child’s immunity. While it may be true that consumptions of these vitamins can help with boosting a child’s immunity, there’s no scientific proof that those vitamins, as contained in Rice Crispies, boost immunity.

This claim comes on the heels of Kellogg’s being shredded over claims it made in April that its Frosted Mini-Wheats were clinically shown to improve children’s attentiveness by nearly 20 perfect. In fact, only half the children in the clinical study had improved attentiveness and of them, only 1 in 9 showed a 20 percent improvement.

Despite Kellogg’s official statement about its “long history of responsible advertising,” it has fallen off the the clinical studies wagon in the past. 3 years ago, the company was also cited for advertising that eating two bowls of Kellogg’s Special K was clinically shown to help you lose weight. In fact, the clinical studies were related to the consumption of milk, not cereal, and thus, the better way to achieve the weight loss results advertised was simply to drink the milk.

Oh Kellogg’s, nice try, but honestly, it’s cereal, snap out of it!

Practice Note: Companies often try to make claims using scientific data from third party sources. While such claims are not illegal to make, clients should be counseled that the overall impression conveyed by the ad must be substantially the same as the scientific results revealed. In many cases, therefore, disclosures must be made in the ad to assure its truthfulness.

Or “Cher,” or even “Carrot Top.” Either The Cobalt lawyers are not up on just how cool Lindsay Lohan is, or she needs to check back into rehab for delusional thoughts.

According to the Wall Street Journal Law Blog, Ms. Lohan has sued E-trade in New York Supreme Court for misappropriation of her name and characterization for one of its “baby” commercials in which a girl baby refers to another girl baby as “that milkaholic lindsay.” According to Lohan’s attorney, such a reference clearly is an attempt to trade off the good name of Lindsay Lohan.

A couple of things her attorney might want to think about: First, all roads do not lead to your client simply because her name is Lindsay. Second, publicly giving the defendants a defense by saying the commercial is a “parody” is probably not a good way to really drive home your own case. Finally, Lindsay may have a hard time establishing that she’s known only by her first name given the fact that she’s never advertised or marketed herself solely as Lindsay, there are over 300,000 women in the country with the name Lindsay. Besides, she was never and abuser of — oh wait, she’s got one strong piece of evidence.

We’re betting this case gets the New York Heave Ho.

The Sycamore Family Bakery (“SFB”) sold his rights in the trademark GRANDMA SYCAMORE and GRANDMA SYCAMORE’S HOME MAID BREAD to Sara Lee for a bucket o’ money. Apparently, granny wasn’t ready for retirement, however.

SFB thought it would be a good idea – and not a violation of its agreement with Sara Lee (predecessor in interest to the original party) – to market a new bread under the name SYCAMORE FAMILY BAKERY, with SYCAMORE as the dominant feature of the mark. For good measure, it added the tagline “The Original Granny Bread” and incorporated a “heart” logo (hearts are also incorporated into the GRANDMA SYCAMORE bread logo sold to Sara Lee).

Sara Lee sued for trademark infringement and for creating a false impression and the court agreed. In Sara Lee Corp. v. Sycamore Family Bakery, the court ruled that he dominant feature of the mark was highly distinctive, and found SFB had clearly taken pains to highlight the SYCAMORE component of the mark while subjugating the other terms. Second, by calling attention to its origin, SFB was deliberately trying to increase the likelihood consumers would get the very false impression the Sycamore Family products were related to and under the control of the trademark now owned by Sara Lee.

In granting the preliminary injunction, the court paid particular attention to the “intentional copying” element of the likelihood of confusion test, suggesting that SFB and “intimate knowledge” of the GRANDMA SYCAMORE family of trademarks made clear it was deliberately trying to trade off the goodwill of the marks. Moreover, the court cited employee “joking about cease and desist letters” from Sara Lee as clear disregard for Sara Lee’s rights.

Practice Pointer: Selling trademarks and then attempting to re-use them is never a good idea. Though obvious enough, clients often believe they have an inalienable right to use their own names, even after entering into a deal with another party to sell them. Attorneys will want to make sure clients understand the full magnitude of what they are selling before they sell it.

Moreover, clients often believe that once a buyer is no longer a going concern, any agreement made with that buyer dissolves. This is rarely the case, since most agreements contain a provision expressly allowing the obligations under the agreement to be transferred.

The Governor of Illinois, recently signed into law a new bill that will allow entities to form a new hybrid corporation: the low-profit corporation. Commonly known as L3Cs, companies can qualify for the low-profit status if their primary objective is to achieve a socially beneficial purpose. L3Cs may greatly reduce the barriers some companies have in doing good work, because as they become more popular, states may pull back cause marketing registration requirements for those companies incorporated as low-profit.

Low-profits differ from for-profits in that they have a maximum financial return on investment. The potential rate of financial return on a standard for-profit company is generally 5% or greater, while fully tax-exempt companies are identified as having a 0% return. A low-profit company is both financial and mission-related, and strives for a financial return on investment of not more than 5%. An L3C can also receive philanthropic investment, so long as the investment provides a low rate of return. Vermont is also an L3 state, as is Montana, with legislation pending in Georgia, Michigan, and North Carolina.

If you don’t have anything nice to say, it’s not OK to lie.

Increasingly, the FTC is going digital-rambo against false advertisers, and the states are following (law)suit. Lifestyle Lift, a cosmetics company has just settled with New York Attorney General Andrew Cuomo for publishing fake reviews about its cosmetic facelift process.

According to documents filed by the attorney general, Lifestyle Lift got employees to post anonymous product and service reviews on websites owned by third parties, making it appear that the reviews were made by genuine product users.

In addition to violating Section 5 of the FTC Act, which proscribes the use of deceptive advertising tactics to sell products to consumers, such conduct also violates many state laws on unfair business practices and false advertising. Cuomo, in a press conference, called the activity “cynical, manipulative, and illegal.” Cuomo would be right.

In fact, reviews are identical in every legal measure to testimonials, where the law is clear: any positive testimonial provided by consumers must be (1) truthful; (2) authorized by the manufacturer of the product; and (3) and must reflect the “typical” experience of a product user. Thus, even if a consumer is telling the truth about a product, if that truth either is not supported by scientific studies, or does not reflect the average customer experience (and therefore distorts the product’s worthiness), such a review is considered false advertising.

As many following the advertising world know, back in April, the FTC announced it will be going after companies who pay others to create viral and influential websites about the benefits of the companies’ products if information on those sites is not truthful.

PBM Products, LLC, which makes infant formula for big box stores like Kroger, WalMart, Sam’s Club, and Target, sued Mead Johnson, claiming the Enfamil maker made false statements regarding its ENFAMIL baby formula.

Mead Johnson’s new direct mail campaign states ”Enfamil LIPIL’s unique formulation is not available in any store brand.” Worse, the suit claims, defendants display a picture of a blurry rubber ducky, implying that customers who give their babies anything other than Enfamil may endanger their child’s vision and brain development. In fact, PBM claims its product is identical to the defendant’s product, according to the lawsuit, which can be downloaded here.

Mead Johnson has been entangled with PBM in the past (and lost), both in litigation, and through challenges at the National Advertising Division (“NAD”). Mead Johnson has also been before the FTC after failing to comply with the NAD decision. Paul Manning, PBM’s CEO, claims that Mead Johnson has twice before made similar false claims, and in both instances, the court banned the company from making more false advertising claims about its products and forced Mead Johnson to make corrections to its advertising.

This lawsuit seems to be ruffling feathers throughout the regulatory world. NAD, the self-regulatory agency which works with advertisers to correct advertising problems without litigation, made the following statement: “NAD is incredulous that after two compliance proceedings, with the second compliance proceeding making explicit that any noncompliant advertising would result in a referral to the appropriate government agency, that the advertiser would disseminate advertising that clearly does not comply with NAD’s decision.” Might we be headed for a three strikes law for marketing?

Practice Pointer: Marketers must be kept “in check” to make sure they are not going beyond ‘puffing’ to sell a product. Over time, a brand (and worse, a company) will lose credibility in the consumer world if no one believes the claims being made. Moreover, if companies would rather avail themselves of the less expensive and less public venue of self-regulatory proceedings believe self-regulatory decisions will be ignored, they are likely to move towards the state and federal court systems to quiet bad actors. When reviewing advertising, always request evidence for the claims being made. While lawyers cannot dictate what their clients will ultimately do, they can help guide companies toward being good corporate citizens.

One last point. This case underscores the importance of looking at an advertiser’s claims from many perspectives. PBM’s suit is focused on the claim that Mead Johnson is the only formula company with an essential formula. The FTC and NAD appear to be more focused on the issue of whether the formula – whatever it is – actually improves brain development.

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On the heels of releasing its new advertising guidelines, the FTC is wasting no time in going after individuals and companies it believes have crossed the line in their advertising practices.

Long a thorn in the side of the FTC, the weight loss market is taking the first hit. Last month, the FTC sought injunctive relief against Stella labs, Neutraceuticals International, and their principles (“Defendants”) for false advertising claims related to products it sold containing – or purporting to contain – the ingredient “Hoodia.”

Hoodia is a succulent plant found in parts of Africa, including South Africa, Botswana, and Namibia. No scientific data suggests it is an appetite supplement, but it is colloquially rumored to suppress the appetite of those who chew it. Hoodia is considered endangered by The Convention of International Trade in Endangered Species of Wild Fauna and Flora and thus its import to the U.S. is heavily regulated. According to the complaint, the only country allowed to export authentic Hoodia is South Africa.

The complaint alleges the Defendants supplied their trade customers with advertising documentation stating or implying their products contained authentic Hoodia, further representing that Hoodia caused substantial weight loss, and claiming Hoodia was an effective treatment for obesity. Based upon these representations, trade customers bought the product and resold it to consumers. None of those claims, says the FTC, had been substantiated at the time the statements were made; moreover, all of the claims, now tested, are false.

Notwithstanding the FTC’s issuing of new advertising guidelines, this complaint does not invoke the higher scrutiny contemplated by the new guidelines. These claims fall squarely into the category of false statements. Unless the Defendants can prove either the truth of their representations, or that at the time the representations were made they were true, the court will make quick work of this matter.

Practice Note: We see it all the time: a client tells us its product is scientifically proven to lose weight. It may even show us the proof. When we probe further, we discover that in fact, the evidence is not about its product, but a single ingredient in the product that has been shown to help lose weight, in certain amounts, and under certain circumstances. In fact, the product has not been proven to lose weight at all. Notwithstanding third party evidence supporting weight loss for an ingredient, a company may not glom on to those results when it sells its own product.

Although we believe it’s unlikely, under the new guidelines yet to be enforced, the FTC might well be able to pursue claims against resellers of the product too, particularly if they are paid through an incentive program. While we have seen no cases on this, the rationale is to hold third parties responsible for reselling products using the same false claims without conducting sufficient due diligence to determine whether the claims are accurate. We believe if the FTC did begin to enforce against resellers, the enforcement would begin with claims the reseller clearly knew or should have known were false.

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The attached is a presentation I gave at the Food Marketing Association Legal Conference in San Antonio.

We had a good time and covered lots of topics. At the end of the day, we hit upon a few important take-away pieces of information:

1. The Social Networking/Social Media (“SM”) boom is not going away. People are going to find more ways to communicate digitally, and as the world’s psychographic changes (younger people start coming into adulthood), vendors who don’t assimilate SM into their plans are going to be left behind.
2. Currently, the legal issues are the same ones we’ve been addressing for the past few years with regard to blogging, domain hosting and user-generated content (third party trademark use; defamatory statements, hijacking of profiles, etc.).
3. In the long run, current law is going to require some tweaks, and we’re beginning to see them (be patient):
— The FTC has already come out with new “affiliate marketing/testimonial” guidelines (clear response to “fake” social networking sites).
– Likely change in SM sites will be clear disclosure of company-sponsored social sites (right now, if you get “busted” for fabricating a site, you’ve just got egg on your face). Legislation likely coming relating to origin.
– Affiliate SM sites likely to have to disclose that they have been paid for their testimonials. This is consistent with existing law regarding testimonials, but not currently enforced.
4. As technology advances, a greater burden will be placed on ISPs to protect against access by children; on the flip-side, parents are going to have to take more responsibility for what their kids are doing online.
The sky is not falling (see my last slide of “babies-booze-betamax”):
– People still (generally) make babies the same way, so online social networking will not replace direct communication.
– Young people will quickly learn how to interact, and in a difficult job market, interpersonal skills will separate out those who don’t have them.
– When new technologies are brought forth, some folks imbibe to excess. Much like the steep rise in alcoholism after prohibition, social mores and legislation over time made most folks use alcohol sensibly; the same thing is true for technology.
– Lawyers out there: relax and take a philosophical view: the fear that everything as we know it will change is unfounded (remember, we thought that the BetaMax would make real-time TV and advertising obsolete). Things will change slowly and over time, but companies will be able to get out their message.

Social Media 1

The FTC has, since the 1980’s, been actively involved in regulating endorsement and testimonial advertising that is designed to entice consumers into choosing products based upon “real life” experience (or the promise of success from a reputable source). Its guidelines help define the scope of testimonial and endorsement advertising. They point out, generally, if a single user’s experience is not typical of the average consumer, then a company may not imply that potential buyers of the product will get the same result. Now, the FTC has determined its rules about testimonials and extreme results need to be updated.

In an attempt to keep up with consumer complaints about dishonest advertising, online social networking and other internet venues that reach consumers, according to the Financial Times, the FTC is proposing legislation that could make companies liable for testimonials written by bloggers and parties who receive free samples or other incentives to try products and subsequently write good reviews.

According to Richard Cleland at the FTC, these new updated guidelines are designed to curb the use of terms like “Results Not Typical,” to justify putting up extreme and untested consumer outcomes for products and services. The new guidelines are also designed to hold companies responsible both for encouraging third party testimonial information it knows to be false, or for using spokespersons who have achieved extreme results for products, knowing the results are outrageous.

If the new guidelines are adopted, companies will not only have to consider how they use spokespersons and social networking sites, but also how they develop their “influencer” programs. Influencer programs are those programs designed specifically to attract a certain target market by paying (or giving free samples to) loyal product users in exchange for spreading the word about their personal experience through social networking (both online and offline) groups. At the very least, it’s likely that contracts between companies and third party influencers will see some changes.

Notwithstanding the spotlight that has hit the FTC proposal and the resultant uproar from many companies and marketing associations, there have been other attempts to regulate third party claims about products and services. Law professor and prolific blogger (and Twitter®er), Eric Goldman, has cited to other attempts at third party testimonial regulation.

For instance, points out Goldman, the Florida State Bar treats consumer reviews of attorneys as regulated testimonials. Goldman even remarks on his Technology and Marketing Blog that the SEC’s recent proposed hyperlinking guidelines may contravene 47 U.S.C. 230 which immunizes websites from liability for third party content.

Regardless of what happens in the short term, issues of agency will be important if the FTC truly wishes to hold companies and bloggers liable for third party content. It is impractical (and likely impossible) for companies to police what third parties write about their products. In all likelihood, therefore, the FTC would limit liability to cases where the company links to or endorses information on a third party site, or where the influencer is retained without a contract provision about outlandish statements.

The biggest challenge, depending on how the guidelines are written, may ultimately be to advertisers who use spokespersons with unusual outcomes, who have until this point, gotten by with a disclaimer of “Results Not Typical,” or “Your Results May Vary.” The long running commercials involving Jared, who claims to have lost hundreds of pounds by eating Subway sandwiches, may have seen their last days.

Practice Note: Despite the current feeling about the proposed guideline changes, the sky is not falling. Advertisers have weathered advertising regulation in the past, and at the end of the day, we still manage to get a fair number of commercials (and testimonials) out there. In truth, and regardless of whether there will ever be another Jared to enable Subway to point to a pattern of weight loss, he won’t go away, and the FTC is not going to find liability with companies or bloggers that are generally engaged in appropriate disclosure practice.

The new logo (shown above next to the old one) is representative of the phone company’s radically new “so very Verizon” campaign.

Further images of the clever campaign are available here.

No word yet on whether the old CAN YOU HEAR ME NOW? tagline will be replaced by the VERY awesome: IS IT HOT IN HERE?

Practice Notes: Rebranding efforts can be effective for companies to update their image and gain new consumers (although they can sometimes backfire, as Tropicana learned recently). Clients should involve their trademark counsel in the rebranding and marketing efforts, so as to assess potential risks (such as likelihood of confusion with existing marks, say, in this case, the SKYPE logo) and protect the new marks, including new trade dress, if applicable.

Tsan’s Comment: Naturally, rebranding efforts that take place on April Fool’s Day and are gone the next day should be suspect (unless you’re introducing New Coke).

The estate of rock legend Jimi Hendrix won a trademark infringement lawsuit against a Seattle, Washington-based businessman who used the star’s name and image to promote his brand of vodka. In Experience Hendrix LLC et al v. Electric Hendrix LLC et al, Case No. 2:07-cv-00338-TSZ (W.D. Wash. 2009). a U.S. District Court judge ruled HENDRIX ELECTRIC VODKA infringes on the estate’s trademarks.

Experience Hendrix and Authentic Hendrix, which owns and licenses Hendrix’s likeness and music won a $3.2 million judgment against Craig Dieffenbach and his Electric Hendrix Spirits. Electric Hendrix Spirits had described the liquor as inspired “by the innovative spirit of legendary musician Jimi Hendrix.”

A legal purple haze has surrounded the deceased guitarist for years. In this case, Hendrix’s sister Janie Hendrix, CEO of Experience Hendrix LLC, alleged trademark infringement and false advertising for its “tasteless promotion” of Hendrix Electric Vodka, sold in purple-tinted bottle. Plaintiffs further alleged that Hendrix’s name and likeness were used without permission. Janie Hendrix, however, isn’t the only Hendrix in this fight. Leon Hendrix, Jimi’s biological brother, who has been engaged in a long-running legal dispute with Janie Hendrix over Jimi’s assets, is a partner in defendants’ venture. Indeed, Mr. Dieffenbach, has helped Leon Hendrix finance his court fight over Jimi’s estate. Here’s a story about the lawsuit and the Hendrix family’s squabbles over who has the right to make money off the late rock star.

In its February 12, 2009 order, the District Court ordered the company to cease using Hendrix products for commercial purposes and ordered the vodka and any related advertising be withdrawn. And the beat goes on . . . .