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2003 Year-end Summary and Hot Topics in 2004

We witnessed many important developments in 2003 relating to advertising and promotions law, some of which will significantly impact the way companies advertise and market their products and services. This alert summarizes the most important legal developments in 2003 and contains our predictions for what will be hot topics in advertising and promotions law in 2004.


In December, President Bush signed into law the first federal law regulating commercial email. Marketers scrambled to comply with the law that took effect on January 1, 2004. The law provides an opt-out framework for commercial email, provides penalties (up to $6 million plus attorneys’ fees) and/or jail time for certain violations, pre-empts state spam laws, and authorizes – but does not compel – the Federal Trade Commission to establish a Do Not Email registry. One of the most difficult issues for advertisers will be maintaining accurate opt-out lists since many advertisers use one or more companies to send commercial email and provide email addresses.

Federal Do Not Call Registry

In October, 2003, we saw the launch of the federal Do Not Call registry. Several last-minute lawsuits challenged the legality of the DNC registry, but the registry is in effect and in December the FCC issued the first citation against a marketer for allegedly violating the new DNC rules. The FTC and FCC also amended telemarketing rules to require new disclosures for upselling, negative option, free-to-pay and continuity plans, and new requirements for billing, authorization, using account information, and prerecorded calls. Beginning January 29, 2004, telemarketers must also comply with the new Caller ID requirements.

Gift Certificate Laws

The use of gift cards and gift certificates has increased dramatically (one retailing report estimates gift cards made up about $17 billion, or 8 per cent, of holiday shopping in 2003), and states are increasingly regulating gift certificates and gift cards. In 2003, California, Connecticut, Indiana, New Hampshire, Maine, and Massachusetts enacted or amended existing gift card laws. These laws may prohibit or limit expiration dates and/or service or dormancy fees and may require certain disclosures. State regulators are tuning in to gift cards as well; Home Depot settled charges with New York’s Attorney General and agreed to modify its gift card policy after consumers complained that the retailer would not replace lost or stolen gift cards.

Advertising and the First Amendment

Nike was sued for violating California’s false advertising law based on statements it made as part of a public relations campaign. The issue was whether Nike’s statements, issued in press releases and published in letters to the editor and paid advertising, were commercial speech or non-commercial speech. The U.S. Supreme Court has held that commercial speech that is false or actually or inherently misleading is not protected by the First Amendment. A California trial court dismissed the case, finding that Nike’s statements were non-commercial and therefore protected by the First Amendment. A California appeals court affirmed, but the California Supreme Court reversed and remanded, finding that Nike’s statements were commercial speech and that the case could proceed to determine whether the statements were false and violated California’s false advertising law. The U.S. Supreme Court agreed to hear the case, and then declined to rule on the case because the parties did not have standing in federal court and the California Supreme Court’s ruling was not a final disposition of the case, and the U.S. Supreme Court did not want to issue a "premature adjudication of novel constitutional questions." The parties settled out of court. In a separate case involving telemarketers who retained 85% of donations made to a charity, the Supreme Court rejected the telemarketer’s free speech argument and ruled that the Illinois Attorney General could proceed with a lawsuit against the telemarketer for failing to disclose that most of the money sent as donations to the charity went instead to the telemarketer.

FTC Enforcement Actions

The FTC announced several settlements with and charges against companies offering continuity programs who violated negative option and mail order rules. In one case, the FTC charged an entertainment company with charging consumers’ credit and debit cards without consent after sending videos and DVDs that consumers had not requested. According to the complaint, the defendants’ advertising failed to tell consumers how the continuity programs operated, failed to obtain consumers’ express consent to be enrolled, and did not give consumers an effective means to cancel their membership once they were enrolled. In another case, marketers of hair products agreed to pay $100,000 in civil penalties and $200,000 in consumer redress for making unsubstantiated claims about the products, charging consumers for products they had not ordered, and violating the Mail Order Rule by failing to ship items within the promised time period.

California Enacts New Privacy and Security Laws

California’s new Online Privacy Protection Act of 2003 requires that an operator of a commercial web site or online service that collects personal information from California residents through the Internet must conspicuously post its privacy policy on its web site. The law, which takes effect July 1, 2004, is intended to give consumers enough information so that they can decide whether or not to visit a web site or use an online service based on its privacy policy. California also enacted a new law, that took effect July 1, 2003, that requires companies that do business in California and own or license computerized records containing personal information – wherever those records are located – to notify California consumers of computer security breaches. California’s strict commercial email law and financial privacy law were nullified by the enactment of the federal CAN-SPAM Act and changes to the federal Fair Credit Reporting Act.

Product Placement Law Suit

In September, a consumer action group filed a formal complaint with the FCC against the television networks, claiming that product placement is paid advertisement and television shows that do not disclose product placement as advertising are violating the sponsorship identification requirements in the federal Communications Act. The consumer group asked the FCC to launch an investigation into the networks’ product placement practices and to initiate a rulemaking to require television stations to clearly and conspicuously identify and disclose product placements as paid advertisements. The group also asked the FTC to issue new guidelines for disclosure of TV product placement. These developments may reflect consumers’ growing awareness of the blurring between advertising and editorial content.

Idea Submission

A Michigan court ordered Taco Bell to pay $30 million in damages, and an additional $11.8 million in interest, to two men who claimed they created the psycho chihuahua concept that was eventually used in Taco Bell’s advertising campaign. The plaintiffs were able to show that they met with Taco Bell executives several times to pitch their idea, that Taco Bell did not license their idea from them, and that Taco Bell soon thereafter launched its psycho chihuahua advertising campaign. This illustrates that a plaintiff can sometimes prevail in a suit for "idea theft" for a creative work that is not copyrightable.

Hot topics for 2004

Commercial email – the CAN-SPAM Act will force most marketers to change their marketing practices, but it will probably not have any significant impact on the amount of spam being transmitted. If consumers don’t see an improvement in their inboxes, legislators may try to force the FTC to establish a Do Not Email registry or they may enact tougher federal commercial email legislation. States can continue to go after email marketers who violate state consumer protection laws.

Privacy – Republicans seem content with the privacy status quo, but a serious privacy scandal could motivate lawmakers to enact tougher online and offine data collecting laws. We might also see pressure from the EU, UK, and Canada over cross-border transfers of personal information since our laws do not provide as much protection for individuals’ personal information as their laws.

Health and obesity – Although several lawsuits blaming restaurants for customers’ obesity have stalled, the issue could gain support. Several organizations have recommended that marketing food products to children be limited and the California Senate approved a menu labeling bill. Federal lawmakers introduced the Common Sense Consumption Act that would prohibit civil lawsuits against food manufacturers, marketers and distributors for allegedly causing obesity, and the Senate Judiciary Committee held a hearing on Super-Sizing and Personal Responsibility. Restaurants and food manufacturers may feel compelled to change their products and/or how they advertise their products. The FTC has also targeted weight-loss products and claims in its latest round of enforcement actions.

Telemarketing – As of December, 2003, consumers have registered over 56 million phone numbers on the national DNC registry. We may see a reduction in telemarketing and an increase in other kinds of direct marketing as a result. We expect to see decisions issued in the suits challenging the new telemarketing rules and we hope the FTC and FCC will issue some guidance on the inconsistencies in the rules, such as how to calculate the 3% abandonment rate. The Caller ID requirements are also presenting some problems that will need to be resolved.

State regulators – The FTC and other federal regulators will continue publicizing high-profile investigations and prosecutions, but the real action is at the state level. State Attorneys General and local prosecutors will continue to aggressively enforce consumer protection laws and target advertisers and marketers in a wide ranges of cases, sometimes in multi-state enforcement actions.

This Report is a publication of Loeb & Loeb and is intended to provide clients and friends with information on recent legal developments which may warrant your attention. This Report should not be construed as legal advice or an opinion on specific situations.

Circular 230 Disclosure: To assure compliance with Treasury Department rules governing tax practice, we inform you that any advice (including in any attachment) (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer, and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.