Many of the regulatory issues facing direct response marketers in 2016 seem familiar, but many have expanded alongside the ongoing push into digital channels. A roundtable of the industry’s leading experts in regulation and government affairs talks about existing and emerging regulatory threats to the industry, and what marketers can do to keep their businesses operating without incident.
- Edward F. Glynn Jr.
Partner, Locke Lord LLP
- Linda Goldstein
Phelps & Phillips LLP
- Bill McClellan
ERA Vice President,
- Amy Ralph Mudge
Partner, Venable LLP
Electronic Retailer: What Federal Trade Commission (FTC) and other regulatory actions of 2015 should concern DR marketers?
Ed Glynn: FTC is expanding the scope of who can be held liable in the direct response industry. These days, when the Commission comes after somebody, they start with the marketer, but they usually don’t end there. What they are doing is going beyond that to people who supply telephone, credit card, and other services.
If you are servicing a marketer as a credit card company, for example, and you become aware that there is a suspiciously high chargeback rate, the days are past when you can say, “It’s the marketer’s problem, not mine.” You have to be on the alert. If you become aware of complaints, the Commission will look at you and asking the famous question from Watergate: “What did they know and when did they know it?”
Linda Goldstein: First, FTC continues to apply stringent substantiation standards to any health or weight-loss claims made for products. Marketers should expect FTC to require at least one robust, double-blind, placebo- controlled study on the product itself, and if advertising contains claims that the product has been “clinically proven,” FTC will look for two robust studies to support the claim.
[The year] also saw a large number of cases involving testimonials and endorsements. In addition to ensuring any material connections between endorsers and advertisers are disclosed, we expect FTC to continue to scrutinize testimonial claims to ensure that they reflect the typical consumer experience. The year also saw FTC use its authority under the Restore Online Shopper’s Confidence Act (ROSCA) to challenge continuity, automatic renewal, and free-trial programs. With penalties of $16,000 per violation, FTC will continue to be incentivized to bring these cases.
Bill McClellan: Lesley Fair, of FTC’s Bureau of Consumer Protection, recently presented a webinar to ERA’s Government Affairs Committee listing the Commission’s “2015 Top 10 for Electronic Retailers.” The top 10 was comprised of substantiation, cognition claims, ROSCA, free and buy one, get one free (BOGO) offers, disclosures, endorsements, native advertising, telemarketing, data security and consumer privacy, and order enforcement. Marketers would be well-served to review their efforts in light of these FTC priorities.
Amy Mudge: Some of the things that happened in 2015 that our members should be concerned about aren’t new. But there were cases involving the terms of the offer such as buy one, get one free deals, and shipping and handling charges—what some might call the pesky details. For the first time, we were seeing terms and conditions being the sole reason for a case.
The other thing we saw is heightened enforcement in the negative option or subscription setting. How you present the offer, how customers accept the offer, how you present the means to cancel, and whether customers can actually cancel will continue to be a focus—and a particularly expensive mistake for marketers that don’t get it right. ROSCA allows for penalties in addition to restitution, so you could see a marketer required to pay back all money earned plus penalties. And FTC has not slowed down on health claims, in spite of a few litigation setbacks.
ER: What are the hot-button issues DR marketers should be aware of in 2016?
Glynn: Cognition claims will probably join weight-loss and moneymaking claims as the hot areas FTC looks at. The Lumosity brain-training program is paying $2 million to settle charges of deceptive advertising, so you’d better have your substantiation in order.
The other area that’s hot for FTC is privacy, following the Wyndham Hotels data breach. If someone were to hack a DR company’s file, they would come away with lots of sensitive information. That hasn’t happened in the industry—yet. Marketers are also interested in finding out why people buy and tracking individuals across platforms. FTC is concerned about the ability of marketers to do this because of privacy issues, and would be interested in letting consumers know that they are being tracked and giving them the chance to opt out.
Two more things are native advertising and endorsements in the new media, which are basically the same thing: When people look at something, do they understand it’s an ad, and do they know whether the person speaking has a connection with the advertiser? When someone makes a statement and has a connection to the advertiser, you have to disclose that.
Goldstein: We expect FTC to continue to take a stringent view of disclosures, and many marketers’ current practices will not pass muster. Marketers should ensure that endorsements are obtained properly, that any payments made to endorsers are disclosed properly, and that endorsements reflect the typical consumer experience. In traditional and social media alike, FTC has made clear that lack of space is no excuse for lack of adequate disclosure. “Made in USA” and environmental claims will continue to be a hot button, [and] we can expect continued enforcement of the Green Guides.
Privacy and data security will continue to occupy center stage in 2016. Marketers should be vigilant about data-collection practices to ensure that they adhere to FTC’s “privacy by design” principles. Marketers should ensure that they have proper procedures in place to protect the security of the data they collect, and most importantly, ensure that data collection and sharing practices are consistent with their privacy policies. The vast majority of privacy cases brought by FTC result from strong privacy promises that the advertiser does not keep. The lesson is, say what you do, and do what you say.
Finally, native advertising—advertising content designed to look and feel like the editorial content surrounding it—may be the hottest button for 2016. Just before New Year’s, FTC issued its guidelines on native advertising, affirming a long-held view that deceptive advertising formats are misleading to consumers, and that advertisers must disclose if they have paid for or influenced the content. The guidelines contain highly prescriptive requirements regarding how disclosures must be made, where the disclosures must be made, and what language the advertiser must use in the disclosure.
Mudge: A lot of what happened in 2015, we see continuing and maybe even escalating into 2016. [Digital channels] are a new area for many ERA members, and there are a lot of minefields there because not only are the rules a bit greyer, they are developing as we speak. Native advertising is going to be a bigger issue, especially when the content has a commercial message that is not identified as such.
FTC just came out with guidance on native advertising, and whenever FTC issues business guidance, what typically happens is that they bring a bunch of cases shortly thereafter as a way of saying to marketers, “Hey, we really mean it.” There are cases in the pipeline where FTC believes that the editorial content did not adequately disclose that there is a commercial message, and there are going to be more this year.
Similarly, cases involving testimonials and online reviews are not a new issue, but an issue where we’re going to see more enforcement. A newer issue is that so many products are purchased online and so many websites have a mechanism for consumers to use to leave a review. To what extent can marketers use online reviews they didn’t ask for, but are nonetheless favorable?
ER: What can marketers do to avoid regulatory controversies and lawsuits altogether?
Glynn: Few marketers have the clout to represent their own interests; the best way forward is to make their interests known to ERA. [On health claims,] a marketer that’s serious about staying out of trouble needs to get an outside person with academic credentials—the hypothetical young associate professor—who can look at the studies and say, “This is what I think.” If the reason you don’t want to do that is because you don’t want to spend the money, it is not that expensive compared to a lawyer. If the reason you don’t want to do it is that you’re afraid of what you might hear, you have to ask yourself, “Why am I selling this product and making these claims?”
Goldstein: Unfortunately, with aggressive class-action plaintiff lawyers, there is nothing a marketer can do to guarantee the avoidance of lawsuits. Marketers can certainly mitigate the risk of a challenge, however, by engaging with counsel early in the creative process to ensure that substantiation will withstand regulatory scrutiny, that its claims are supported by testing, and that its marketing practices are legally compliant.
McClellan: Get a good lawyer early and follow their advice. I also encourage industry participants to pay attention to the Electronic Retailing Self-Regulation Program (ERSP). The other thing that can help keep folks out of trouble is to ensure that a critical mass of company employees are engaged in, and have ownership of, industry best practices. The best way to get everyone up to speed is to take advantage of the educational offerings ERA provides through trade shows and webinars.
Mudge: As long as there is marketing, there is going to be enforcement. The best preventive medicine is to make sure that a marketer is being as smart as possible about avoiding obvious mistakes. It doesn’t mean that you are not going to get an inquiry over the use of a buy one, get one free offer or the use of testimonials. But if the overall way you sell your products is consumer-friendly and not fraught with “gotchas,” it’s less likely that the states and FTC are going to take a closer look.
The second piece of that is dealing with customer complaints when they come in. If a marketer is hearing customer complaints and is not responding, those people will not go away—those people will complain somewhere else. They will complain to the Better Business Bureau; they will complain to FTC; they will complain to their state and local authorities—and that’s the way many of these investigations get started. If marketers ignore complaints, they ignore them at their own peril.
ER: Will the election year have an effect on regulation and legislation?
Glynn: The effect of elections on FTC is generally small. There is really no constituency for fraud, and hardly anybody likes to get annoying phone calls at home. Privacy initiatives are wildly popular on the Hill, and on both sides of the aisle.
Goldstein: Over the last 10 years, FTC has remained consistently vigilant and active, irrespective of which party is in office. The one area that might be impacted by the election would be in the area of privacy and data security. The outcome could impact whether efforts to pass privacy legislation will ultimately be successful.
McClellan: The presidential election year will have a chilling effect on any hot-button or controversial issues between now and Tuesday, Nov. 8, 2016. Soon after, we will know what issues have the potential to become “hot” during the next session of Congress and the next president’s first term in office.
Mudge: Consumer protection is generally something that is apolitical—you won’t see Republicans saying “I don’t like consumers,” and Democrats saying, “I do.” Every politician is in favor of consumer protection.
ER: How can DR marketers ensure that their interests are represented in Washington, D.C.?
McClellan: The first rule is to engage in the political process—and the best way to do that is to attend ERA’s Government Affairs Fly-In each spring, where you can get first-hand introductions to the regulators and legislators who are responsible for the oversight of your business.
The dysfunction in Washington, D.C., has led to unintended consequences—not all of them bad. One of the positive developments has been the ongoing strength and growing importance of the self-regulatory process. These efforts will continue to gain importance and prestige, and in the long run, be key to ensuring viable alternatives to any misguided legislative efforts that attempt to govern our business practices.
Mudge: Listen when FTC puts on a workshop or puts out a call for comments, and think about whether it’s something you want to weigh in on. If you have an opportunity to participate in the dialog, you have an opportunity to potentially shape an outcome.
Even marketers familiar with FTC demands may not be prepared for recent developments in class action lawsuits and litigation.
Direct response advertisers face a number of hurdles in getting the word out about their products, mostly from FTC regulations put in place to protect consumers. But class action lawsuits are a particular source of consternation—not only are they difficult to predict and avert, but some also seem to be filed in search only of profit.
“You’ve seen a substantial uptick in consumer class actions and false advertising class actions,” says Daniel S. Blynn, an attorney in Venable LLP’s Advertising and Marketing Practice. “Where you’re really seeing class actions explode is in the Telephone Consumer Protection Act (TCPA). We have seen a huge increase in those since last summer.”
Cases like these are easy to file. If a marketer calls, texts, or faxes a consumer who has registered on the national Do Not Call list using an autodialer, that consumer can file a class action suit. And the damages for a company found guilty of such a violation in federal court can be staggering—$1,500 per call, text, or fax.
That adds up fast when the system makes thousands of calls every day. “TCPA cases are fairly straightforward, but in certain instances, these are complete cash cows,” Blynn says.
Worse, new guidance from the Federal Communications Commission (FCC) could open more defendants to TCPA class actions, he says. The FCC’s new definition says that any technology that can be modified to autodial is an autodialer—a definition that includes most smartphones. “Anyone using an iPhone could be using an autodialer and could be exposed to TCPA litigation,” Blynn says.
“Be sure to know which calling platform you use, and scrub lists of numbers to make sure the autodialer doesn’t accidentally call people on the Do Not Call registry,” he warns. “If you are going to place a call to a number on the Do Not Call list, make sure you have the appropriate consent. Consent differs by the kind of call, and that includes texts, too.”
Venable is currently tracking a case that could alleviate the pressure marketers face from class action lawsuits. The U.S. Supreme Court heard arguments in Tyson Foods, Inc. v. Bouaphakeo in November 2015, and will issue a decision on the case later this year.
The decision could narrow the circumstances under which a class action is certified by changing how damages are calculated. “The normal thing is to come up with a damages model that applies to the entire class of complainants to avoid different damages for each person,” Blynn says. “The presumption is that all class members are identical.
“A favorable decision would mean that a class could not be certified, and without class certification, most of these cases would go away, because the damages are so low on an individual level,” Blynn says. “It would be very good for future class action defendants.” — IPM