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Reed Smith

Delaware Court Upholds Edgy Anti-Smoking Campaign
The Delaware Supreme Court has turned away a claim that a series of anti-smoking ads aimed at young people unfairly disparages tobacco companies.

The Lorillard Tobacco Company, the nation’s oldest tobacco company, had challenged the “truth®” campaign, produced by the American Legacy Foundation (ALF). The latter is a Delaware nonprofit group formed from the 1998 Master Settlement Agreement (MSA) between the major tobacco companies and 46 state attorneys general to educate youth about smoking dangers.

In a 32-page opinion, the Delaware Supreme Court described in detail ALF ads featuring a giant document shredder, purported attempts to reform tobacco executives, an entrepreneur peddling dog waste, and emissaries delivering a lie detector machine.

The high court concluded in its July 17 opinion that the ads did not violate a provision of the MSA prohibiting advertising that includes personal attacks or the vilification of tobacco company employees or the companies themselves. See Lorillard Tobacco Company v. American Legacy Foundation, No. 579, 2005. The decision upholds an earlier ruling by the Court of Chancery.

ALF intentionally created edgy advertising to reach the youth most likely to start smoking, the court noted.

“ALF has designed the ads to inform its target audience of manipulative marketing techniques because published research has demonstrated that these types of messages are the most effective ones for discouraging the rebellious, anti-authoritarian segment of young people who otherwise are the most likely segment of the population to begin smoking,” the court stated.

In one of the ads cited by Lorillard, entitled “Shredder,” a cargo truck with the “truth®” logo tows a large machine labeled “Shredder 2000” and stops in front of an office building. Although the scene is only identified by the words, “Outside a major tobacco company,” the building is Philip Morris’s New York City headquarters, and may be recognizable to some, the court noted.

Two youths with megaphones stand beside the machine, which is in fact, a wood chipper. They make several announcements, including, “Attention tobacco manufacturer! Do you have a lot of embarrassing reports lying around the office? You can’t just leave that to any paper shredder, you need Shredder 2000!” And, “That is right folks. You need Shredder 2000 to use on documents like this research report from 1981 that says ‘Today’s teenager is tomorrow’s potential regular customer.’”

In “Hypnosis,” three youths drive a truck through the suburbs seeking to “reform” tobacco executives. Upon being directed to a neighborhood of large homes, they cue a tape from inside their van, and through a loudspeakers on top of the van, a woman’s soothing voice delivers messages such as, “I am a good person. Selling a product that kills people makes me uncomfortable. I realize cigarettes are addictive.”

In “Lie Detector,” several young people enter the headquarters of Phillip Morris (which are not identified) and ask to speak with Rita, the VP of marketing, announcing they have a delivery for the marketing department. They then offer the explanation, “We have a lie detector to clear up the confusion…. Your company has said that nicotine isn’t addictive, and then you say that it is.”

“Dog Walker” is a radio ad that begins with the phone ringing. A woman answers, “Good afternoon, Lorillard.” The caller proceeds to explain that he is a dog walker by trade, and offers to sell the company dog urine, which contains urea, one of the chemicals in cigarettes.

Though the ads do expressly or impliedly refer to tobacco companies, and in one case an employee, they did not violate the MSA, the Delaware Supreme Court concluded. “The advertisements are not invidious, disparaging, offensive, belligerent, nor fiercely or severely critical. Nor are they denouncements that are both unfounded and abusive or slanderous.”

In fact, the court noted, “[t]he tone of the youth in the advertisements is usually expressly friendly or helpful, even if impliedly drawing attention to unflattering facts about past actions of tobacco companies or their employees.”

The court did hold that ALF violated the MSA by including in its ad campaign a site on its Web site where visitors could fill in form letters and email them directly to tobacco company employees. However, the court upheld the Chancery Court’s decision not to award damages because Lorillard had blocked the letters and therefore not suffered harm.

The court also ruled in Lorillard’s favor on another point. ALF had argued it could not be sued for violating the MSA because it was not a party to the agreement. However, the court concluded that under the preincorporation doctrine, the states that agreed to establish ALF bound it to the terms of the MSA.

Why This Matters: By interpreting the restrictions contained in the MSA narrowly, the Delaware courts have given ALF wide creative breadth. The decision is good for ALF, as well as advertisers generally that are faced with the need to interpret a private agreement containing advertising restrictions.

08-10-2006

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Reed Smith

FCC Allows EBR Exception for Faxes
The Federal Communications Commission announced that its new rules reinstating the established business relationship (EBR) for fax marketing became effective Aug. 1.

This was good news for marketers who depend on sending commercial faxes.

The FCC rules implement the Junk Fax Prevention Act of 2005. That Act was passed by Congress to create a statutory safe harbor allowing businesses to send commercial faxes without obtaining specific prior approval from parties with whom they have an EBR. Note that nothing in the Act or the FCC’s new rules permit a marketer to send commercial faxes to recipients with which no EBR exits, unless there is prior written permission.

The Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227, requires a sender of commercial faxes to have the express invitation of recipients before sending faxes, but for years, the FCC allowed senders to presume that they had the recipient’s permission whenever an EBR existed. However, as a part of a general review of the FCC’s TCPA rules in 2003, and in response to overwhelming complaints by fax recipients, the FCC abolished the EBR exception. This created a firestorm from those businesses and nonprofits that regularly provide commercial information by fax. In response, Congress passed the Junk Fax Prevention Act of 2005 to regulate, but not prohibit, the use of commercial faxes.

Specifically, the TCPA prohibits the use of “any telephone facsimile machine, computer, or other device to send an unsolicited advertisement to a telephone facsimile machine.” The TCPA applies only to those facsimile messages that constitute “unsolicited advertisements,” which describe the availability or quality of property, goods or services.

The FCC’s new rules codify the EBR exemption to the prohibition against sending unsolicited faxed advertisements, and define an EBR to be used in the context of unsolicited faxed advertisements. The FCC also requires the sender to prove the existence of the EBR, and that if a fax number was obtained after July 8, 2006, such fax number was publicly available.

The rules also contain an “opt-out” requirement, mandating that parties who send facsimile advertisements provide notice and contact information on the fax that allows recipients to “opt-out” of any future faxes from the sender. This notice must specifically state that the recipient may make a request to the sender of the advertisement not to send any future advertisements to a telephone facsimile machine or machines, and that failure to comply, within 30 days, with such a request is unlawful; opt-out requests must be honored within 30 days, and once a recipient has opted out of fax communications, the EBR exception ceases to exist even when the recipient continues to do business with the sender.

Why this Matters: While the ERB has been restored, the Junk Fax Prevention Act of 2005 and the FCC’s rules implementing the new Act provide for strict and detailed regulation of the sending of commercial faxes. It is important, therefore, that businesses or nonprofits engaged in commercial faxing understand and comply with these requirements.

08-10-2006

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Reed Smith

Foundation Releases Advergaming Report; Industry Action To Follow
The Kaiser Family Foundation released in July a report that the group states is the first comprehensive analysis of the “nature and scope” of online food advertising to children.

The report, “It’s Child’s Play: Advergaming and the Online Marketing of Food to Children,” was produced in response to concerns by policymakers in Congress, and agencies such as the Federal Trade Commission and Institutes of Medicine, regarding the lack of data on the subject, Kaiser stated.

Researchers reported that more than 85 percent of the top food brands that target children through television advertising also use branded Web sites to market to children online; and 73 percent of those sites offered advergames—online games in which a company’s product or brand characters are featured.

The Kaiser staff designed the study in collaboration with a Notre Dame marketing associate professor, Elizabeth Moore, Ph.D. Researchers examined food brands that ranked in the top 80 percent of television advertising spending, identifying 96 brands and 77 Web sites.

Kaiser’s report concluded that 65 percent of Web sites used sweepstakes and promotions; 64 percent employed viral marketing (encouraging children to contact their peers about a specific product or brand); 53 percent provided on-demand access to TV ads; 38 percent offered incentives for product purchases; and 25 percent offered memberships.

Based on data from Nielsen NetRatings, the sites studied received more than 12.2 million visits from children ages 2-11 during the second quarter of 2005, Kaiser reported.

“Online advertising reach isn’t as broad as that of television but it’s much deeper,” said Vicky Rideout, vice president and director of Kaiser’s Program for the Study of Entertainment Media and Health.

Kaiser’s study identified 546 online games featuring one or more food brands. Most—71 percent—offered the chance to play games more than one time; however fewer than half—45 percent—offered multiple levels of play, and only 22 percent suggested other games viewers might enjoy.

Nutrition Information
Touching on an area of particular concern to regulators, Kaiser’s study reports that barely more than half the sites studied—51 percent—provided nutritional information, such as that found on product labels, on the food products they marketed.

Researchers found that 44 percent of sites included some nutritional claims, and 27 percent contained information concerning healthy eating habits and diets.

Other Ads
Most of the Web sites studied—76 percent—offered “extra” branded options, such as screensavers, wallpaper for children’s computers, branded CD covers, and branded logos and characters that can “live” on a child’s computer desktop. In addition, about 35 percent of sites offered educational content.

Privacy Compliance
Most sites—97 percent—provided parents with information, including notice concerning the data that is collected from children, legal disclaimers, information concerning computer “cookies” and compliance with the Children’s Online Privacy Protection Act (COPPA).

However, the report noted, although CARU’s guidelines state that “advertising content should be clearly identified as such” on product-driven Web sites, only 18 percent of the sites studied included any kind of “ad break” or other notice to children that the content on the site included advertising.

Why This Matters: The rising rates of childhood obesity and other health concerns have led advocates and policymakers to scrutinize food marketing practices. The industry is under pressure to tighten self-regulatory guidelines or face government regulation.

08-10-2006

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Reed Smith

New Jersey Prohibited From Requiring Employees To Participate in Political or Religious Events
New Jersey Governor Jon Corzine recently signed important legislation that prohibits an employer from mandating employee attendance at political or religious events. N.J.S.A. 34:19-9 et seq. The law provides that an employer may not "require its employees to attend an employer-sponsored meeting or participate in any communications with the employer or its agents or representatives, the purpose of which is to communicate the employer's opinion about religious or political matters.

08-10-2006

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Reed Smith

SEC Decides Not to Appeal Goldstein Decision
On Aug. 7, 2006, SEC Chairman Christopher Cox issued a statement concerning the SEC's decision not to seek en banc review of the decision of the U.S. Court of Appeals for the District of Columbia in Phillip Goldstein, et al. v. Securities Exchange Commission (i.e., a review by all of the judges on the D.C. Circuit), and not to petition the U.S. Supreme Court for a writ of certiorari (i.e., a request to the Supreme Court to take the case for review in its discretion).

08-10-2006

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Reed Smith

Sens. Brownback, Clinton Speak Out on Food Marketing
Lawmakers recently expressed continued concerns regarding the state of food marketing to children, placing added pressure on the industry to develop solutions that keep regulators at bay.

The setting was a forum held July 20 by Children Now, an advocacy organization. The event attracted Sens. Hillary Clinton (D-N.Y.) and Sam Brownback (R-Kan.), as well as three of the five current commissioners from the Federal Communications Commission.

In addition, the forum featured the unveiling of a new report by the Kaiser Family Foundation on the widespread use of food-branded online games, “It’s Child’s Play: Advergaming and the Online Marketing of Food to Children.” (See related story, “Foundation Releases Advergaming Report; Industry Action To Follow.)

Sens. Clinton, Brownback and Joe Lieberman (D-Conn.) are sponsoring bill S. 1902, which would provide funding for a comprehensive study of the effects of media on children.

Sen. Brownback stated that he currently does not support a Congressional mandate restricting food marketing to children, preferring that the food and advertising industries take action without government intervention.

Sen. Clinton seemed to take a more interventionist stance: “I think a lot of parents don’t understand the damaging effects of constant media exposure—the manipulation of children’s minds by advertisers—and they don’t exercise responsibility or believe they have the tools to do so.”

Some lawmakers and regulators are poised to act now. Sen. Jay Rockefeller (D-W.Va.) has proposed legislation that would prohibit interactive or “click-through” advertising during children’s television programming. The Association of National Advertisers sent a letter to Senators on July 17 warning that “new media innovations and communications technologies will be strangled or severely damaged” by such legislation.

Speaking at the forum, FCC Commissioner Jonathan Adelstein (Dem.) stated that the agency should “severely limit” click-through advertising. Commissioner Michael Copps (Dem.) said that “at a minimum,” parents should be able to turn off such services on their TV sets.

Former FTC Consumer Protection Bureau Chief Jodie Bernstein noted to reporters recently that well-crafted industry self-regulation can produce broader, more effective standards than government regulation, because government regulations run up against First Amendment concerns. Bernstein is chairing an effort by the Council of Better Business Bureaus to produce a food program for marketers that could change the mix of advertising messages that are directed toward children.

Why This Matters: Although this conference was sponsored by a fringe consumer group, it was attended by very main-stream politicians. This signals a change in the political environment surrounding the food marketing debate as it relates to obesity. Even though there is still no reliable, scientific basis for believing that food marketing has a significant impact on obesity (as opposed to lack of exercise and poor eating habits), serious politicians have begun to put their weight behind these initiatives. Clearly they see political value in taking an anti-advertising position. This means that as we approach the November elections, food marketers who advertise to kids will continue to be under pressure to self-regulate or possibly face congressional hearings that will seek to demonize them before the public.

08-10-2006

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Reed Smith

The German Supreme Court Approve Customer Referral Advertisements But Restrict Advertisement Campaigns for Medical Products
Facts
The Federal Court had to decide on an advertisement campaign of an optometrist chain. The optometrist distributed leaflets to its existing customers and asked them to attract new customers with the slogan “customers refer new customers” in order to purchase lens glasses. In case a referred customer purchases lens glasses with a purchase value of at least 100 Euro, the promoting customer was eligible to choose between six different awards each worth about 30 Euro. The plaintiff claimed this advertisement to be an anticompetitive “Laienwerbung” – an advertisement campaign using laymen or third parties. The lower instances each held in favor of the plaintiff. The appeal to the Supreme Court was also dismissed.

Background
The legitimacy of the advertising campaign whereby a price is promised in case of a customer referral has been debated by the German courts over the last years. For instance, in 1990, a similar advertising campaign with regard to credit cards was held illegal. The Court stated that such referral advertisement would commercialize private relationships. The referring customer, being a layman without knowledge of the product, would use his personal contacts to obtain the reward.

Change of the view by the Supreme Court
Although the Supreme Court held the advertisement at the case at hand illegal, it expressively stated that it no longer adheres to these principles regarding customer referrals without restrictions. The Court stated that neither the fact of offering of a material incentive nor the use of personal relationships when referring a customer would render an advertisement illegal. Customers have been educated and do not need to be shielded from advertisements as this might have been the case years ago. This is evidenced by the fact that the government stroke the Illegal Rewarding Act and the Sales Discounts Act in recent years.

However, although the Supreme Court held that customer referral campaigns will not be as strictly viewed as in the past, in the case at hand it decided that such liberalized approach does not apply for medical products. The lens glasses advertised do fall within the Act regarding advertising for medical products (“Heilmittelwerbegesetz”) and are as such subject to certain special restrictions. Pursuant to § 7 Heilmittelwerbegesetz, the offering, announcing and awarding of rewards and other like advertisement regarding medical products is restricted. Based on that restriction a customer referral campaign has to be viewed as an inadequate and not objective exerting of influence pursuant to Art 4 Unfair Competition Act.

Consequences
This decision by the Supreme Court may have a strong impact on advertisement in Germany. Although the Court held against the defendant, it might leave room for new campaigns which use laymen and existing customers under the motto of “refer a customer”. The Court’s reasoning shows clearly that the earlier reservations of the Federal Court with regard to customer protection no longer apply as such. The Court now views customer as self-responsible participants in the market who are very well able to decide whether they are in need of a certain product or not. This reasoning does not apply for medical products since consumers may require a professional consultation.

08-10-2006

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