CAN-SPAM Does Not Preempt State Law Claims
Under California Statute

Hypertouch, Inc. v. ValueClick, Inc. (Cal. Ct. App. Feb. 10, 2011)

The Parties:

Hypertouch, Inc.:

• Plaintiff Hypertouch, Inc. ("Hypertouch") provides electronic mail service to approximately 100 customers located in and outside of the State of California.
• Plaintiff's customers complained about receiving "massive quantities" of unsolicited commercial email.
• As a result, plaintiff was forced to spend a great deal of money on hardware and software to manage incoming unsolicited commercial email messages.

ValueClick:

• Defendant ValueClick, Inc. and its subsidiaries (collectively, "ValueClick") provide online marketing services to third-party advertisers.
• ValueClick contracts with these advertisers to place promotional offers on websites that are owned and operated by ValueClick entities.
• ValueClick also contracts with thousands of affiliates to drive traffic to their websites through email placement and the use of other advertising vehicles.
• ValueClick affiliates send out commercial email messages that include links redirecting consumers to promotions on ValueClick websites.

PrimaryAds, Inc.:

• Defendant PrimaryAds, Inc. ("PrimaryAds") is an online marketing company that operates websites containing third-party promotional offers.
• PrimaryAds contracts with a network of independent affiliates that download marketing materials from its websites for use in commercial email messages.

Complaint:

• Hypertouch alleged that its customers received over 45,000 email messages - in which defendants advertised - that contained deceptive header information in violation of Section 17529.5 of the California Business and Professions Code.
• Specifically, Hypertouch alleged that the "From" or "To" fields of the subject email messages did not accurately identify the sender or recipient of the email; the subject lines of many of the email messages contained statements likely to mislead recipients into believing that they could receive a "free" gift, when in fact there was a condition to be met (fee or participation in some promotional offer); and some of the email messages contained a third party's domain name without permission.
• Defendants moved for summary judgment arguing that such claims were preempted by the CAN-SPAM Act.

CAN-SPAM Act – Preemption Clause:

• The Act preempts any state statute "that expressly regulates the use of electronic mail to send commercial messages except any statute . . . [that] prohibits falsity or deception in any portion of [an email message]."

California Code Section 17529.5:

• The statute, in pertinent part, prohibits the sending of deceptive commercial email messages, such as those that contain or are accompanied by: (1) a third party's domain name without the permission of that party; (2) falsified, misrepresented, or forged header information; and/or (3) a subject line that a person knows would be likely to mislead a recipient

Defendants' Claim:

• The exemption for state statutes prohibiting "falsity or deception" was intended only to permit state law claims based on all of the elements of a common law fraud complaint (including knowledge, intent, reliance and proximate damages).

Trial Court:

• The trial court granted summary judgment in favor of defendants concluding that the CAN-SPAM Act preempted the state law claims, as they failed to assert claims for common law fraud or deceit.
• Plaintiff appealed.

Court of Appeals:

• The court of appeals conducted an in-depth review of Section 17529.5, as well as the CAN-SPAM Act, reviewing legislative history and how it was applied in earlier decisions.
• Ultimately, the court reversed the decision and found that the "CAN-SPAM Act's savings clause applies to any state law that prohibits material falsity or material deception in a commercial email regardless of whether such laws require plaintiff to prove and plead each and every element of common law fraud."
• In so doing, the court found that the California State law claims were not preempted by the standard set by the CAN-SPAM Act.
• In fact, in analyzing the CAN-SPAM Act, the court pointed out that it was not intended to apply to common law fraud.

Looking Ahead:

• Spambulance chasers are likely to be emboldened by this decision and, as a result, we should see several new cases filed in the State of California in the coming months.
• We will continue to follow the case for any further appeals and developments.

Company to Pay $250,000 to Settle FTC Charges
of Misleading Product Reviews

In re Legacy Learning Sys., Inc. and Lester Gabriel Smith
FTC File No. 102 3055
Federal Trade Commission
Press Release - March 15, 2011

Federal Trade Commission ("FTC") Complaint:

• Legacy Learning Systems, Inc. ("Legacy Learning") sells instructional guitar-learning DVDs and written materials.
• According to the FTC's complaint, Legacy Learning employed an affiliate marketing program through which "Review Ad" affiliates promoted its courses via endorsements in articles, blog posts and other online material.
• The FTC alleged that on many affiliate websites, affiliate-generated endorsements appeared close to hyperlinks to Legacy Learning's website.
• Affiliates allegedly received substantial commissions on the sale of each product resulting from the endorsement referrals.
• According to the FTC, these endorsements generated more than $5 million in sales of Legacy courses.
• The FTC complaint accused Legacy Learning and Lester Gabriel Smith of violating the FTC's Revised Endorsements and Testimonials Guides issued in 2009 (the "Revised Guides"), by representing that online endorsements written by affiliates reflected the views of ordinary consumers or "independent" reviewers, without clearly disclosing that the affiliates were paid for every sale that they generated.

The FTC's Revised Guides:

• The Revised Guides are intended to give advertisers information on how to keep their endorsement and testimonial ads compliant with the provisions of the Federal Trade Commission Act (the "Act").
• Pursuant to the Revised Guides, any person who is connected to the seller and gives a positive review of a product or service, or receives payment or free products/services for that review, should disclose the material connection between the reviewer and the seller of the product or service.

Proposed Settlement:

• Legacy Learning will pay $250,000 to the FTC.
• The company will also be required to: 1) monitor and submit monthly reports to the FTC on their top 50 revenue-generating affiliate marketers; 2) disclose in any endorsement advertising that these affiliates earn commissions for sales; and 3) ensure that the affiliates are not holding themselves out to the public as independent or ordinary consumers

Looking Ahead:

• The FTC has indicated its commitment to ensuring that advertising to American consumers is truthful and not deceptive, regardless of the advertising medium.
• Companies should be on notice that the FTC is willing to bring enforcement action for conduct in violation of the Guides.

FTC Settles Deceptive "Opt-Out" Practices With Online Advertiser

In re Chitika, Inc.
FTC File No. 1023087
Federal Trade Commission
Press Release – March 14, 2011

Federal Trade Commission ("FTC") Complaint:

• According to the FTC's complaint, Chitika buys ad space on websites and arranges for advertisers to place small text files ("cookies") on those sites.
• The FTC alleges that Chitika uses "behavioral advertising" – by placing "cookies" on consumers' browsers, the company is able to track consumers' online activities and then display ads that relate to their demonstrated online interests.
• Chitika's privacy policy discloses that it collects consumer preference data but allows consumers to "opt out" of having cookies placed on their browsers and receiving targeted ads.
• Within this privacy policy is an "opt-out" button that consumers may click, which will activate a message that states, "You are currently opted out."
• The FTC complained that from May 2008 though February 2010, the opt-out election lasted for only 10 days. After that period of time had elapsed, Chitika is alleged to have placed cookies back on those consumers' browsers who had opted out (and delivered targeted ads to them).
• The FTC maintained that Chitika's claims about its opt-out procedure were deceptive and violated federal law.

Settlement:

• The settlement prohibits Chitika from making misleading statements concerning the extent of its consumer data collection, as well as consumer ability to control such collection, use and sharing of data.
• The terms of the settlement also require that every targeted ad published by Chitika in the future include a hyperlink that takes consumers to a clear opt-out mechanism allowing them to opt out from behavioral advertising for at least five (5) years.
• Chitika has agreed to destroy all identifiable user information collected when the defective opt-out mechanism was in place.
• Chitika must also inform consumers who had previously tried to opt out that their attempt was not effective and that they should re-opt out in order to avoid receiving any future behavioral advertising.

Looking Ahead:

• The FTC is diligently pursuing and defending consumer rights in the online marketing space.
• Companies offering opt-out functionality should consider this settlement and ensure that such mechanisms and procedures are not misleading.

FTC Asks Court to Shut Down Text Messaging Operation

Federal Trade Commission v. Flora
(C.D. Cal. Case No. SACV11-00299-AG-(JEMx))
File No. 102-3005
Federal Trade Commission
Press Release – February 23, 2011

Federal Trade Commission ("FTC") Complaint:

• According to the FTC, defendant Phillip A. Flora sent millions of text-based marketing messages to mobile consumers offering loan modification help, debt relief and other services.
• Specifically, the FTC alleged that for 40 straight days, defendant sent more than 5.5 million unsolicited text messages to mobile consumers.
• Consumers had to pay their mobile carriers for receipt of these unwanted text messages.
• The text messages allegedly advised consumers to respond to the messages or visit one of defendant's websites to obtain the marketed services.
• The FTC complained that one (1) of the sites, loanmod-gov.net, misled consumers by using a domain name that appeared to be a governmental web address (noting the "gov" part of the domain name). This site allegedly claimed to provide "Official Home Loan Modification and Audit Assistance Information," while displaying an image of the American flag.
• The complaint also stated that defendant collects information from consumers who respond to the text messages, including those who respond by asking defendant to stop sending the messages.
• Finally, the FTC alleged that defendant sells the consumer contact information that it collects to third-party marketers.

FTC Charges:

• The FTC charged the defendant with violating the FTC Act for the sending of unsolicited commercial text messages to consumers and for misrepresenting that his company was affiliated with the government.
• Further, the complaint alleges that defendant advertised his text message blasting services by sending consumers unsolicited commercial email that violated the CAN-SPAM Act. The subject email messages also allegedly failed to include an "opt-out" mechanism, as well as the sender's physical postal address.

Looking Ahead:

• We will continue to follow this action and report on any new developments.
• The FTC is diligently "policing" the mobile marketing industry to ensure that companies do not send consumers unsolicited text messages and email in violation of applicable law.

Parties Settle Case Involving Employee Discharged for Facebook Comments

American Response v. International Bhd. of Teamsters, Case No. 34-CA-12576
NLRB Press Release – February 8, 2011

Summary of the National Labor Relations Board ("NLRB") Complaint:

• The NLRB's Hartford Regional Office issued a complaint alleging that an ambulance service illegally terminated an employee who posted negative comments about her supervisor on her personal Facebook page.
• According to the complaint, the company, American Medical Response of Connecticut, Inc., illegally denied the employee union representation during an investigatory interview.
• Further, the complaint alleged that the company also maintained an overly-broad blogging and Internet policy.

Facts Surrounding the Case:

• The employee was asked by her supervisor to prepare an investigative report concerning a customer complaint about her work.
• At that point, the employee requested and was denied union representation.
• Later that same day, from her home computer, the employee posted a negative remark about her supervisor on her personal Facebook account.
• Fellow employees posted supportive comments, which led to the posting of additional negative remarks by the subject employee.
• Citing a violation of the company's blogging and Internet policy, the employee was suspended and ultimately terminated for her Facebook postings.

NLRB Investigation

• The NLRB found that the employee's postings constituted protected concerted activity and that the company's blogging and Internet policy contained unlawful provisions.
• Those provisions included prohibiting employees from making disparaging remarks when discussing the company or supervisors and another that restricted employees from depicting the company in any way over the Internet without company permission.
• According to the NLRB, these provisions constitute interference with employees in the exercise of their right to engage in protected concerted activity.
• Under the National Labor Relations Act, employees have the right to discuss the terms and conditions of their employment with co-workers and others.

Settlement:

• The company agreed to revise its overly-broad online posting rules to ensure that they do not improperly restrict employees from discussing their wages, hours and working conditions with co-workers and others while not at work. The company agreed that it would not discipline or discharge employees in the future for engaging in such discussions.
• The company also promised that employee requests for union representation will not be denied in the future and that employees will not be threatened with discipline for requesting such representation.
• The allegations concerning the employee's discharge were resolved through a separate, private agreement between the employee and the company.

Summary:

• Corporate Internet policies must be carefully written and enforced. Failure to do so may result in a violation of federal and/or state labor laws.

Illinois Governor Signs Amazon Sales Tax Legislation

House Bill 3659

New Illinois State Sales Tax Law::

• In January 2011, the Illinois State Legislature passed the "Mainstreet Fairness Bill" requiring Internet retailers to collect Illinois State sales tax if they have marketing affiliates located in Illinois.
• The law defines "affiliate" as an online marketing company that refers customers to e-retailers in return for a commission on any sale resulting from such referrals.
• On March 10, Illinois Governor Pat Quinn signed the bill into law, citing a need to "put the state's 'main street businesses' on a 'level playing field' with online retailers and to protect main street jobs."
• As a result of the passage of the tax law, Amazon.com has promised to terminate its Illinois State affiliate marketing program.

New York Amazon Tax:

• The Illinois law has been modeled after a recently-enacted New York State version that Amazon (so far) has attempted to challenge in the State courts.
• Amazon contended that the New York statute violates the equal protection clause of the United States and New York State Constitutions because it "intentionally targets" the company.
• Amazon has hundreds of thousands of independent website affiliates to whom it pays commissions for linking to products for sale on its website.
• A New York State Supreme Court judge ruled that the tax law was constitutional.
• The court pointed out, "[i]n the end, the Commission-Agreement Provision does not broadly tax any and all Internet sales to New York consumers. . . . It requires a substantial nexus between an out-of-state seller and New York through a contract to pay commissions for referrals with a New York resident along with realization of more than $10,000 of revenue from New York sales earned through the arrangement. The neutral statute simply obligates out-of-state sellers to shoulder their fair share of the tax collection burden when using New Yorkers to earn profit from other New Yorkers."

Other States Follow Suit:

• It has been reported that once Rhode Island and North Carolina adopted similar "Amazon" laws, Amazon terminated its agreements with affiliates based in those states.
• Other states, including California, Arizona, Connecticut, Hawaii, Minnesota, Mississippi and Vermont, are all considering enacting similar "Amazon" laws.
• Amazon has threatened to sever ties with affiliates in California if the law is passed there.

Looking Ahead:

• We will continue to monitor and report on any developments concerning the "Amazon tax" as they transpire across the country.
• Illinois may suffer significant revenue loss if Amazon makes good on its promise to pull affiliate agreements in the State.

Disclaimer Found in Website Terms and Conditions
Fails to Defeat Fraud Claim

Badella v. Deniro Mktg. LLC (N.D. Cal., No. 10-03908, Jan. 24, 2011)

Facts:

• Defendants own and operate adult dating websites.
• According to the court, defendants attract consumers to their websites through the use of unsolicited commercial email, Internet pop-up advertising and social networking "scams."
• Potential consumers who accept a free trial membership are sent automated email messages that entice them to purchase a fee-based membership.
• Once that occurs, users are also "upsold" memberships to other "fake" websites that claim to enhance the chances of meeting women.
• Defendants' websites are "built upon a huge database of fake user profiles specifically designed to deceive consumers into paying to join and continue using the sites."
• The subject class action complaint alleges that defendants' websites fraudulently "lured" consumers into joining and paying for subscriptions to the sites with the false promise that they are communicating with real women who are interested in dating and/or an intimate relationship.
• Defendants filed two (2) motions to dismiss the allegations, claiming that the class has not sufficiently pleaded "reliance" pointing to the websites' disclaimers.

The Website Disclaimers:

• Users of each of the sites were required to agree to the website Terms and Conditions (the "TAC"), which included the following provisions:

  "You understand and accept that our site, while built in the form of a personals service, is an entertainment service."

  "You understand, acknowledge, and agree that some of the user profiles on this site may be fictitious, and are associated with our 'Online CupidsTM' . . . ."

  Court Decision:

• Despite the disclaimer found in the TAC, the court found that the class sufficiently pled reliance and allowed the fraud claim to proceed.
• The court held that the TAC did not defeat an allegation of reliance in light of the following allegations: 1) the entirety of each of the websites is fictitious; 2) many of the fictitious profiles and messages are not labeled as such as represented by the TAC; and 3) although users were directed to the "Online Cupids" section of the TAC, there was a "widespread and pervasive effort on defendants' part to make [each of] the website[s] appear to be a legitimate dating service."
• The court cited the decision in United States v. Yarnell, 129 F.3d 1127, 1134 (10th Cir. 1997), in pointing out that "disclaimers do not necessarily defeat reliance, at least where the wealth of information is intended to create a false impression and the disclaimer is not as prominently referenced as the material giving the false impression."

Conclusion:

• The court provided the following example of a disclaimer truly intended to put users on notice that they were not providing a legitimate dating service:

  "THIS WEBSITE USES FICTITIOUS PROFILES – READ THIS DISCLAIMER" or "THE MAJORITY OF PROFILES YOU SEE WILL NOT CORRESPOND TO ACTUAL WOMEN – READ THIS DISCLAIMER."