As part of the Federal Trade Commission’s ongoing efforts to shut down scams that target financially vulnerable consumers, a U.S. district judge has issued a $478 million judgment at the request of the FTC against the marketers of three get-rich-quick systems that the agency says are used for deceiving consumers. The order is the largest litigated judgment ever obtained by the FTC.
The judgment was awarded against companies and individuals who marketed the schemes, titled “John Beck’s Free & Clear Real Estate System,” “John Alexander’s Real Estate Riches in 14 Days,” and “Jeff Paul’s Shortcuts to Internet Millions.”
Nearly a million consumers paid $39.95 for one of these “get-rich-quick” systems, and some consumers purchased personal coaching services, which cost up to $14,995. According to the FTC complaint filed in June 2009, one system was marketed to consumers with the promise that consumers could “quickly and easily earn substantial amounts of money by purchasing homes at tax sales in their area ‘free and clear’ for just ‘pennies on the dollar’ and then turning around and selling these homes for full market value or renting them out for profit.”
The FTC said that nearly all the consumers that bought the systems lost money.
The FTC’s suit alleged violations of the Federal Trade Commission Act, based on the defendants’ representations in connection with the advertising, marketing, promoting and sale of the systems. The FTC also alleged that the defendants’ violated the Telemarketing Sales Rule through their marketing to consumers.
Two of the individual defendants, Douglas Gravnik and Gary Hewitt, were held jointly and severally liable for the monetary part of the judgment. The judge also imposed a lifetime ban from infomercial products and telemarketing against Gravnik and Hewitt. Gravnik and Hewitt indicated that they are likely to appeal the order to the extent it imposes a lifetime ban. A third individual, John Beck, is responsible for $113.5 million of the judgment.
In its case, the FTC filed 30 consumer declarations detailing consumers’ experiences with the defendants’ products. The defendants objected to many of these declarations on various grounds, including hearsay, relevance, and the best evidence rule among other objections, but these objections were all overruled.
The defendants also objected to the use of a survey by the FTC that showed that less than 0.2 percent of consumers who purchased the defendants’ system made any profits and only 1.9 percent of consumers who purchased coaching material made any revenue. The defendants moved to exclude all evidence relating to the survey on the ground that the pre-notification letter “poisoned the well in such a way as to invalidate whatever survey finding the FTC obtained” and argued that the manner in which the survey was conducted rendered the results unreliable. The court found that the survey was performed under accepted principles used by experts in the field and was admissible.
The court granted summary judgment for the FTC , finding that the defendants made material misrepresentations that were either false or unsubstantiated. The court pointed out that the materials provided by the defendants to consumers taught consumers how to purchase tax liens and certificates, but these purchasers do not obtain title to the property and thus were not “purchasing” the homes as the advertising materials stated.
The court also granted summary judgment on the Telemarketing Sales Rule allegations. The basis of the defendants’ argument was that the violations were isolated and should not be the basis for liability. The court found that there was no dispute that the defendants’ telemarketers repeatedly initiated calls to consumers who asked the defendants not to contact them. The FTC also produced “overwhelming” evidence that the defendants lacked a meaningful compliance program or any written procedures in place to comply with the regulations.
Jeffrey Klurfeld, director of the FTC’s Western Region, stated in a press release that “This huge judgment serves notice to anyone thinking of using phony get-rich-quick schemes to defraud consumers. The FTC will come after you if you violate the law.”
In this case, the FTC had already completed its surveys when it went to court. Trial judges will often be very impressed with FTC surveys and will grant judgment to the agency in nearly every case. Therefore, it is critical that a company that is being targeted by the FTC obtain counsel at the earliest possible stage, before the agency files anything in court. Counsel should be ready to vigorously defend the client’s marketing practices with techniques such as the use of countersurveys and customer testimonials and expert testimony, before the FTC files in court.
For-profit education institutions may have breathed a sigh of relief on June 30, 2012, when a federal judge struck down most of the Department of Education’s Gainful Employment rule. The decision came none too soon, as the U.S. District Court for the District of Columbia issued the ruling literally on the eve of the day the regulations were slated to take effect. But these colleges and universities should not rest on their laurels. While the court sided with the private sector in this instance, the judge’s opinion keeps the door open for more and similar regulation.
To address concern over the seeming disconnect between debt burden and employment prospects of graduates of for-profit colleges and universities, the DOE last year published its Gainful Employment rule. The rule was instituted to test schools’ compliance with the Higher Education Act’s requirement that certain institutions must “prepare students for gainful employment in a recognized occupation” in order to qualify for federal funds. To accomplish this, the rule set forth three tests, one or more of which a school would need to meet, to qualify for federal funds. The tests required that:
1. At least 35 percent of graduates must be repaying their loans,
2. The median graduate’s estimated annual loan payments must not exceed 12 percent of earnings, or
3. The median graduate’s estimated annual loan payments must not exceed 30 percent of discretionary income.
The rule further required that subject schools make certain disclosures to prospective students and obtain DOE approval for new programs.
The Gainful Employment rule stirred up consternation in the for-profit world, as concerns mounted over the costs of compliance. The Association of Private Sector Colleges and Universities, the main association representing the for-profit education industry (with over 1800 members), challenged the rule in court.
The APSCU argued that the Gainful Employment rule exceeded statutory authority by stretching the meaning of the term “gainful employment.” The court squarely sided with the DOE on its authority, noting that “gainful employment” is not an unambiguous term and that the DOE has the authority to assess whether educational programs prepare students for gainful employment. The only question, according to the court, was whether the DOE had reasonably promulgated rules to test programs’ ability to prepare students.
Working through an analysis of the rules, the court ultimately determined that the debt repayment standard (No. 1 above) “was not based upon any facts at all. No expert study or industry standard suggested that the rate selected by the Department would appropriately measure whether a particular program adequately prepared its students, the court wrote. The reason: The rule was solely based upon statistics that at the 35 percent rate, roughly 25 percent of schools subject to the rule would fail, i.e. the rate was set because it would knock out the bottom quarter of schools.
The judge rightly ruled that this basis — merely picking a compromise figure — “is not reasoned decisionmaking.” Since the other standards were so intertwined with the debt repayment test, the judge struck them down as well, leaving remaining only the disclosure provisions of the rule.
The APSCU and the for-profit industry have hailed the judge’s decision as a victory. But the industry needs to understand that it may be just the first of a series of regulatory battles. The court’s opinion read largely like an opinion favoring the DOE. Notably, the judge stated that “the Department has gone looking for rats in ratholes — as the statute empowers it to do.” And the court squarely upheld the DOE’s regulatory authority to go about enforcing something just like the Gainful Employment rule, so long as the basis is grounded in sufficiently reasoned standards.
It is not clear yet how the DOE will proceed, and whether it will go about another round of rulemaking. But the court’s opinion provides ample incentive for the administration to take another turn at Gainful Employment.
After nearly a decade of persuading hundreds of thousands of parents that their babies were geniuses, the popular company, Your Baby Can Read, is shutting its doors. Its demise is the result of an FTC investigation prompted by the Campaign for a Commercial-Free Childhood advocacy group, which challenged claims by the company that newborns have the ability to absorb reading and spelling skills when they are as young as three months old. According to the company’s website, the cost of fighting these legal battles has left the company with no option but to close.
Your Baby Can Read consists of interrelated videos, flash cards and books designed to teach infants as young as three months old to read. Developed in the late 1990s by Robert Titzer, an educator with a Ph.D. in human performance from Indiana University, the product claims that babies have a small window in which they absorb spelling at an extraordinary pace. Although these claims have never been substantiated through any kind of credible research, fans of the products, which are priced at $200, have given them glowing reviews. More than a million families have used the products, which the company extensively advertised on TV, at exhibitions, and on its own website, Facebook page and YouTube channel.
In April 2011, a class of consumers who purchased the educational programs filed a class action complaint against the company in California challenging the effectiveness of the product. Additionally, the Boston-based Campaign for a Commercial-Free Childhood (CCFC) filed a complaint against the company with the FTC, leading the way for a series of campaigns against what critics call the “genius baby” industry. The national watchdog group previously successfully campaigned against the way that the “Baby Einstein” program marketed its products. In its complaint with the FTC, CCFC argued that Your Baby Can Read’s claims of teaching infants to read lacked scientific support. The group requested that the FTC stop the company from continuing its allegedly deceptive marketing practices and that the company offer full refunds to “all parents who have been duped.” According to CCFC director Dr. Susan Linn, the company “exploited parents’ natural tendency to want what’s best for their children” by making grandiose promises that find no support in science.
The problem with these types of educational products appears to be twofold. First, doctors and scientists who have tested the products have reportedly found that infants using the products are not reading, but rather are memorizing the shapes of the letters presented. Second, as the CCFC points out, the program can actually be harmful to children, as it encourages them to sit in front of television screens and computer monitors, getting them “hooked on screens” too early in life. In fact, the group notes that if parents follow the “Your Baby Can Read” instructions, by nine months, babies would have spent more than a full week of 24-hour days in front of a screen.
Although the company is going out of business, the FTC will not automatically cease its investigation. The FTC says it aims to protect the most vulnerable classes in society — and perhaps none are more vulnerable than young children, or, in this case, their overachieving parents who just want their bragging rights. It will be interesting to see which group of consumers will come out on top in the FTC investigation – the thousands of parents who were satisfied with the product or the class-action parents whose children were perhaps not as smart as they believed them to be.
The barely year-old Consumer Financial Protection Bureau came out of the gate this week with its first enforcement action. Capital One has the dubious honor of being CFPB’s premier target under the bureau’s authority to take action against entities that it believes engage in unfair, deceptive, or abusive practices in the offering of consumer financial products and services. Congress created the CFPB as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That law broadly empowers the CFPB to supervise and enforce the nation’s consumer financial laws.
The CFPB claimed that Capital One’s telemarketing vendors used certain deceptive marketing practices to pressure or mislead consumers into paying for “add-on” products such as payment protection and credit monitoring. The practices of particular concern to the CFPB included:
• Misleading consumers about the benefits of the products – for instance that the product would improve credit scores when that was inaccurate
• Deceiving consumers about the nature of the products – CFPB claims some consumers were told the products could be cancelled, while canceling was difficult to accomplish
• Taking orders from ineligible consumers and then denying claims later based upon eligibility
• Leading consumers to believe the products were free when they were not
• Enrolling consumers without the consumer’s express consent
Capital One agreed to a consent order, in which the bank neither admits nor denies the allegations. The consent order provides for refunds to two million consumers of at least $140 million and a $25 million penalty. The consent decree also places additional restrictions and oversight on Capital One, including a requirement that it stop the marketing of these products until it has presented an acceptable compliance plan to ensure these acts do not recur. Capital One must also submit to an independent audit to determine if it has met the conditions of the consent decree, and it must ensure the refunds are automatic so that consumers do not have to take any action to obtain their refunds.
In addition to the consent order and the associated press release, the CFPB also issued a compliance bulletin stressing that institutions will be held liable for actions by third-party vendors operating on their behalf. The agency stressed certain proactive actions that companies should take to ensure that marketing materials and customer service interactions do not violate the law. Among these practices are the review of scripts, ads, radio and TV commercials to make sure they reflect the actual terms of the products and are not deceptive or misleading. The CFPB also cautioned that employee incentive and compensation programs tied to add-on products should require that employees adhere to guidelines and not create incentives for employees to provide inaccurate information.
Those familiar with FTC enforcement will note many similarities, as the CFPB has stated it will follow FTC precedent on “unfair” and “deceptive” practices. The CFPB has also made clear that service providers and others who “knowingly or recklessly provide substantial assistance to a covered person or service provider” may face the CFPB’s wrath.
While this is the first CFPB action, others are sure to follow as the CFPB is engaged in ongoing examinations and has issued subpoenas. The CFPB is also working closely with state attorneys general and the FTC, sharing information on potential violations and coordinating enforcement actions. We expect to see several additional CFPB actions as the new agency flexes its enforcement muscles, particularly in the mortgage, credit card, educational and “pay day” loan arenas.
Kim Kardashian, the reality star, is accustomed to the public eye, but now she faces a lawsuit that may not bring her good publicity at all. Along with her sisters Khloe and Kourtney, Kim has been named as a defendant earlier this year in a class action over QuickTrim, a dietary supplement that they have been promoting.
The complaint, filed in the U.S. District Court for the Southern District of New York, accuses the Kardashians (along with QuickTrim’s manufacturer, Windmill Health Products; the retailer GNC; and others in the sales and marketing chain) of false and deceptive marketing of the diet aid. The plaintiffs, hailing from several states, brought claims under their respective states’ consumer protection laws alleging false and deceptive advertising, as well as other claims under federal and state common law. The corporate defendants are represented by John Robert Vales of Riker Danzig Scherer Hyland Perretti of Morristown, N.J.
The basis for the suit appears to be the Food and Drug Administration’s findings on the use of caffeine in dietary supplements. According to the lawsuit, the FDA has determined that caffeine is not a safe or effective treatment for weight control. Since QuickTrim’s main ingredient, according to the plaintiffs’ complaint, is caffeine, QuickTrim is not a safe or effective treatment — and thus, QuickTrim consumers were sold an unsafe, ineffective treatment.
Where Kim & Ko fit in is that they are the product’s face, with their images plastered across QuickTrim’s labeling, packaging, and advertising. They have also actively promoted the QuickTrim product line on their Twitter and Facebook accounts and personal web pages. Their promotional activities include Twitter feeds like: “Hi dolls, have you seen the QuickTrim buy one get one free sale at GNC? Just in time for bikini season!” Or: “Aw thanks doll! I try 2 work out every morning in my Shapeups and I use QuickTrim. It’s important to stay in shape.” Plaintiffs allege that they were deceived into buying QuickTrim products – products that are “worthless” and of “no value” – by the sisters’ promotional activities.
The plaintiffs’ complaint is already in its third iteration. The latest version, filed July 2, 2012, is a clear response to the Kardashians’ Motion to Dismiss filed in June. The Kardashians moved to dismiss an earlier version of the plaintiffs’ complaint, arguing that there are no reported cases supporting a private right of action for spokesperson liability. They further argued that the Kardashians were not alleged to be sellers or merchants of QuickTrim, which is required to successfully assert breach of warranty and contract claims. Finally, they argued the plaintiffs’ state law claims of deceptive advertising failed because there are no allegations or proof (1) that the Kardashians were not bona fide users of QuickTrim products at the time they made public statements, (2) that the public statements did not reflect the Kardashians’ honest opinions, findings, beliefs or experiences, and (3) that the Kardashians knew, based upon their personal experiences, that the advertising claims of the manufacturer, which the sisters repeated, were false.
The July 2 amended complaint attempts to overcome these deficiencies by peppering the filing with allegations (1) that “[t]he Kardashian sisters deal in goods of this kind – weight loss and fitness products – and hold themselves out as having knowledge or skill peculiar to the weight loss field” and (2) that “the Kardashian sisters are not bona fide users of QuickTrim, and their public statements endorsing the products do not reflect their honest opinions, findings, beliefs and experiences.”
It will be interesting to see what the court does with the case and whether it will allow it to survive another likely round of dismissal requests. It is clear from the Federal Trade Commission’s 2009 revised guidelines on celebrity endorsements that a celebrity product sponsor may get into hot water for repeating unsubstantiated health claims about a product. But a possible enforcement action by the FTC does not translate into a private right of action for consumers. Celebrity endorsers should have some degree of immunity from these types of suits. Otherwise, they risk being beleaguered by consumer publicity-seekers. The more appropriate course of sanction for disgruntled consumers is the filing of an FTC complaint, which the FTC can review and determine whether there is a basis for action.
The media world has changed radically since the last time that the Federal Trade Commission took a look at the marketing efforts of the nation’s major alcoholic beverage producers. So the FTC is taking a fresh look, emphasizing the recent explosive growth of social media in its continuing effort to determine whether the industry is self-regulating its marketing efforts as well as it should.
The FTC is requiring fourteen major producers, including Anheuser-Busch, Diageo and Bacardi, to release information about their Internet and digital marketing presence. The FTC will then use the data collected in the study to make recommendations about how the industry should regulate itself.
The commission’s last marketing study was completed in 2008 and was based on data from 2005. In 2005, Twitter did not exist yet, YouTube had just been launched, and Facebook was a year old. In that study, of the companies surveyed, only 1.9 percent of their $3.3 billion in marketing expenditures were spent on digital media.
This study marks the first time that the FTC is asking alcohol producers to provide detailed information on their Internet and social media practices, data collection and tracking practices of visitors. The 14 major alcoholic producers must produce responses to the FTC by June 11, 2012.
The FTC is limited in what it can do with the data collected, but the goal is a report that would help determine future advertising rules for websites and social media. The FTC generally lets the industry set its own advertising guidelines, and the three main alcoholic beverage industry trade associations have compliance systems in place to ensure that advertising targeted at underage audiences is minimized. Two of the three trade associations have implemented new guidelines to address marketing on social media sites.
This is an ambitious action by the FTC that could lead to increased government involvement in Internet activities. Industry self-regulation has been effective thus far and can continue to be effective. It remains to be seen what recommendations the FTC will develop after this study, but we will keep you posted.
On May 30, 2012, the Federal Trade Commission held a workshop at its conference center in Washington, D.C., entitled “Advertising and Privacy Disclosures in the Digital World.” This workshop was intended both to provide guidance to the public concerning the FTC’s advertising requirements and to solicit input from the public for updates to the FTC’s existing online advertising guidelines, “Dot Com Disclosures” (DCD). The FTC hopes to update the DCD to take into consideration advancements in technology and advertising since the guidance document was initially introduced in 2000, including the discussion of platforms such as mobile devices and social networking.
Of particular interest to us was the panel entitled “Universal and Cross-Platform Advertising Disclosures.” This panel focused on how to make disclosures, rather than on the particular information that needs to be disclosed or who should be liable for failures to disclose. The panel hoped to explore and develop best practices for this purpose and discussed public comments for the FTC’s consideration in updating the guidelines. The panel, moderated by Michael Ostheimer, a staff attorney in the agency’s Division of Advertising Practices, was composed of consumer advocates, advertiser representatives, academics, corporate counsel, and an assistant state attorney general.
The panel emphasized that there are valid ways to allow merchants and advertisers flexibility in marketing on space-constrained forums while still making adequate disclosures to consumers. The panelists stated that it is impractical to try to put all relevant terms on one page, and that it may be counterproductive to do so since consumers will only read a fraction of the information. Therefore, clearly labeled hyperlinks may be used to draw attention to essential terms.
For example, a web page advertisement for coolers stating “satisfaction guaranteed” might be considered deceptive if a hyperlink lower on the page simply marked “Disclosures” led to a page disclosing that a material potential investment, such as a restocking fee for returned items, limits the guarantee. Therefore, the advertisement could be more compliant if the disclosure were closer to the relevant claim (“satisfaction guaranteed”) and if the hyperlink stated clearly the material term, such as “Disclosure – Restocking Fees Apply.”
The panel also agreed that the disclosures required to prevent deception are directly tied to the claims made in the advertisement. By limiting the dissemination of triggering claims, the advertiser also limits the necessary disclosures. Also, the complexity of the offer dictates the necessary disclosures. If an offer includes a continuity plan or other conditions or restrictions, the disclosures will necessarily also be more complex to prevent deception. It is important to note that a disclosure that contradicts an advertisement is not sufficient to make an advertisement non-deceptive.
The panel recommended that the FTC guidelines deal only with substantive issues and that the specific form of the disclosures, as opposed to their substance, be left to the discretion of the advertisers and merchants. For example, while disclosures must be prominent, there should not be a requirement that certain conditions be in bold, italics, or a certain font size. With text-based advertisements, such as tweets or sponsored search results, such a contrast is not possible. Therefore an upfront text disclosure, such as “Purchase Required,” should be sufficient to meet the standard.
The panelists were right to emphasize the need for advertisers to have flexibility and self-regulation without imposing FTC guidelines that do not comport with how business is done in the modern world.
We hope that the FTC will keep pace with evolving technology and business needs to allow advertisers flexibility to promote their products in ways that will best reach consumers.
Pomegranate juice maker POM Wonderful has declared victory against the FTC . . . in spite of an administrative law judge’s ruling that upholds many claims in the agency’s complaint. But the California company has good reason to celebrate: certain FTC standards, the ones that POM cried foul on, were rejected by the court.
The epic battle between POM Wonderful and the FTC began roughly two years ago during an agency investigation of the company for false advertising. The FTC had approached POM with a proposed requirement of enhanced advertising standards for medical and health claims. These would have required the company to seek FDA approval before making certain claims; the standards would also have required more stringent research requirements for substantiation of such claims.
To support these new standards, the FTC showed POM consent orders it had recently entered into with Nestle U.S.A. and Iovate Health Systems, Inc. That’s when POM cried foul. It saw the FTC’s moves – shifting and enhancing standards through consent orders with other companies, as opposed to traditional notice and hearing procedures – as a major overstepping and defiance of the rulemaking process. The company took its complaint to court, filing a lawsuit in U.S. District Court for D.C. against the FTC for violating its First and Fifth Amendment rights. The FTC within two weeks issued its administrative complaint against POM for false advertising.
Now, two years later, after a voluminous hearing record in the administrative proceeding, the administrative law judge in the FTC’s action has issued an opinion upholding certain false advertising allegations in the FTC’s complaint – based on implied as opposed to express claims – but also siding with POM on the company’s major issues of contention. (Note that POM’s action in the U.S. District Court appears to still be pending as of May 23, 2012.)
POM is touting victory based on rulings by the judge that (1) any FDA pre-approval requirement “would constitute unnecessary overreaching” and that (2) more stringent double-blind, randomized, placebo-controlled studies were not necessary. It appears that these rulings effectively put the kibosh on the FTC’s sliding scale of regulation through settlement agreements … at least in this instance.
An important holding from the court that POM has cited in its press release is that “[t]he greater weight of the persuasive expert testimony in this case leads to the conclusion that where the product is absolutely safe, like POM Products, and where the claim or advertisement does not suggest that the product be used as a substitute for conventional medical care or treatment, then it is appropriate to favor disclosure.”
The court thus addressed some of POM’s concerns over a chilling effect on free speech that could have resulted from the FTC’s attempts to require FDA preapproval for certain health claims. This is a concern we had identified in an earlier post on the matter. While many articles published on the judge’s opinion to date have been headlining POM’s losses, the more important aspect may be the judge’s findings in favor of the company.
Whether you or not you are an avid gamer, you have probably realized that a significant segment of the general population takes gaming quite seriously. Probably a little too seriously sometimes.
It seems that the ending to the popular game Mass Effect 3 (“ME3”), which is produced by BioWare, disappointed many devoted players so much that they filed a petition with the FTC for deceptive advertising. According to the petition, the company’s advertising convinced the players that they were able to change the game’s ending, but in reality, there were only three different endings and they were relatively similar.
Unsurprisingly, the FTC did not comment on the petition. One can only imagine the “parade of horribles” that would happen if the FTC acted on the petition. We might see petitions against any movie that was not as good as advertised, against ball clubs for not being as competitive as advertised, against colleges for not being as good as advertised, and the like.
Generally, the FTC takes the reasonable position that consumers have a certain amount of responsibility for their purchases and should understand that even legitimate advertising is meant to persuade the consumer to purchase something. (On the other hand, BioWare’s co-founder, Dr. Ray Muzyka, did take the petition seriously and released a statement that “the team are hard at work on a number of game content initiatives that will help answer the questions, providing more clarity for those seeking further closure to their journey.”)
However, the same argument can be applied to some of the advertising campaigns that the FTC has criticized. For example, one could argue that a reasonable consumer should understand that Google is not going to hire him to work from home and compensate him handsomely, with absolutely no experience, and even without any job interview. Likewise, one could persuasively argue that the government is obviously not giving out grants to nearly every applicant for any random cause, just so long as you sign up for the monthly fee. Yet the FTC does oppose these forms of suggestive/misleading advertising.
One wonders if the true distinctions are the targeted audience of the advertising and the nature of consumer loss. If the targeted audience represents a more unfortunate and vulnerable segment of society, then the FTC is more likely to step in to protect the unfortunate and vulnerable consumer. If the targeted audience is more able to fend for themselves, however, the FTC is less likely to step in to protect them.
In addition, the consumer who is taken in by a misleading work-at-home scheme has, at the very least, lost valuable time and money. The consumer who plays ME3 has had a game experience for his or her money, just one that is perhaps not as exciting as he or she expected. There is a difference.
As a final note, there is a bright side to this petition. In an effort to draw attention, an online petition to redo the ending of ME3 also started a donation drive for Child’s Play, which provides video games for patients at children’s hospitals worldwide. In less than two weeks, the drive reached its goal and raised slightly more than $80,000. We are confident that even the FTC can agree that the charity drive was a good thing!
The world is full of surprises, like the fact that Nutella chocolate spread is loaded with saturated fat and sugar and is not itself healthy.
Ferrero USA, Inc., the company that makes Nutella, learned the hard way that many American parents could not survive (nor perhaps could their children) without the aid and intervention of Captain Obvious. And so, following a recent settlement agreement with some confused parents, the maker of Nutella will modify its labeling, advertising, and website to clarify its nutritional value.
The problems arose from a line of advertisements and website content suggesting that Nutella could be part of a healthy breakfast. While many of us might understand that Nutella’s contributions to a healthy breakfast are the equivalent of Cheez Whiz’s contributions to a healthy side of broccoli, a couple of California moms said they were duped. They were surprised to learn that it was other elements of a breakfast – like a glass of milk, or the whole-grain bread the Nutella would top – that were healthy and that all Nutella did was to get children to the table.
The SoCal gals took their stupefaction to court, filing a class action for violations of state consumer protection laws in the U.S. District Court for the Southern District of California in early 2011. A literal reading of the advertisements (samples of which can be found on pages 19-27 of the complaint) should make it reasonably clear that Nutella, in and of itself, is not a nutritionist’s top pick. The ads qualify Nutella as a way to get children to eat healthy foods (see again, Cheez Whiz). But those qualifications were not clear enough to the plaintiffs, who were “shocked” that Nutella had the nutritional value of a candy bar.
Ferrero attempted to get the class action transferred to U.S. District Court in New Jersey, where a follow-on suit was filed, and also attempted to get the actions dismissed. The company’s tactics failed, leaving it with little choice but to pursue costly defense or to settle. The company chose the latter course and entered into a $3million-plus settlement for both cases. While the sum may seem staggering in comparison to the allegations, most of the settlement ($2.5 million) is dedicated to reimbursing consumers, in $4/purchase increments. The company has also agreed to clarify its nutritional value in its labeling, advertising and website.
What’s troubling is that Ferrero’s advertising was full of qualifications about the role Nutella can play in nutrition. It’s only the careless or dismissive or naïve parent who could have been “duped.” In the end, this appears to be yet another example of our system protecting willful blindness.